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Firm-specific risk-neutral distributions with options and CDS

Sirio Aramonte, Mohammad Jahan-Parvar, Samuel Rosen and John W. Schindler

No 921, BIS Working Papers from Bank for International Settlements

Abstract: We propose a method to extract the risk-neutral distribution of firm-specific stock returns using both options and credit default swaps (CDS). Options and CDS provide information about the central part and the left tail of the distribution, respectively. Taken together, but not in isolation, options and CDS span the intermediate part of the distribution, which is driven by exposure to the risk of large but not extreme returns. Through a series of asset-pricing tests, we show that this intermediate-return risk carries a premium, particularly at times of heightened market stress.

Keywords: risk neutral distributions; investor expectations; CDS spreads (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2021-01
New Economics Papers: this item is included in nep-fmk
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