Template-Type: ReDIF-Paper 1.0
Author-Name: Sirio Aramonte
Author-X-Name-First: Sirio 
Author-X-Name-Last: Aramonte
Author-Name: Mohammad Jahan-Parvar
Author-X-Name-First: Mohammad 
Author-X-Name-Last: Jahan-Parvar
Author-Name: Samuel Rosen
Author-X-Name-First: Samuel 
Author-X-Name-Last: Rosen
Author-Name: John W. Schindler
Author-X-Name-First: John W.
Author-X-Name-Last: Schindler
Title: Firm-specific risk-neutral distributions with options and CDS
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.
Length: 68 pages
Creation-Date: 2021-01
File-URL: https://www.bis.org/publ/work921.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work921.htm
File-Format: text/html
Number: 921
Keywords: risk neutral distributions, investor expectations, CDS spreads
Classification-JEL: G12, G13, G14
Handle: RePEc:bis:biswps:921