A Note on Pricing Options on Defaultable Stocks

In this note, we show that simple models that explicitly accounts for the market participants’ fear that the stock prices will plunge, is capable of explaining the implied volatility skew. Key Words: Option pricing, multiscale perturbation methods, defaultable stocks, stochastic intensity of default, implied volatility skew.

• Type: Journal
• Year: 2007
• Where: CORR
• Authors: Erhan Bayraktar
• Keywords: CORR 2007, Education, Implied Volatility, Multiscale Perturbation Methods, Simple Models