Rare disasters, credit, and option market puzzles

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Standard

Rare disasters, credit, and option market puzzles. / Christoffersen, Peter; Du, Du; Elkamhi, Redouane.

In: Management Science, Vol. 63, No. 5, 01.05.2017, p. 1341-1364.

Research output: Contribution to journal/Conference contribution in journal/Contribution to newspaperJournal articleResearchpeer-review

Harvard

Christoffersen, P, Du, D & Elkamhi, R 2017, 'Rare disasters, credit, and option market puzzles', Management Science, vol. 63, no. 5, pp. 1341-1364. https://doi.org/10.1287/mnsc.2015.2361

APA

Christoffersen, P., Du, D., & Elkamhi, R. (2017). Rare disasters, credit, and option market puzzles. Management Science, 63(5), 1341-1364. https://doi.org/10.1287/mnsc.2015.2361

CBE

Christoffersen P, Du D, Elkamhi R. 2017. Rare disasters, credit, and option market puzzles. Management Science. 63(5):1341-1364. https://doi.org/10.1287/mnsc.2015.2361

MLA

Christoffersen, Peter, Du Du and Redouane Elkamhi. "Rare disasters, credit, and option market puzzles". Management Science. 2017, 63(5). 1341-1364. https://doi.org/10.1287/mnsc.2015.2361

Vancouver

Christoffersen P, Du D, Elkamhi R. Rare disasters, credit, and option market puzzles. Management Science. 2017 May 1;63(5):1341-1364. https://doi.org/10.1287/mnsc.2015.2361

Author

Christoffersen, Peter ; Du, Du ; Elkamhi, Redouane. / Rare disasters, credit, and option market puzzles. In: Management Science. 2017 ; Vol. 63, No. 5. pp. 1341-1364.

Bibtex

@article{6c66d6faa3b34a69a588a802f5aa095f,
title = "Rare disasters, credit, and option market puzzles",
abstract = "We embed systematic default, procyclical recovery rates, and external habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and showthat a single set of structural parameters calibrated to the real economy can simultaneously explain several key empirical regularities in equity, credit, and options markets. Our model captures the empirical level and volatility of credit spreads, generates a flexible credit risk term structure, and provides a good fit to a century of observed spreads. The model also matches high-yield and collaterized debt obligation tranche spreads, equity market moments, and index option skewness. Finally, our model implies a time-varying relationship between bond and option prices that depends on the state of the economy and that explains the conflicting empirical evidence found in the literature.",
keywords = "Consumption risk, Credit spreads, Option skewness, Stochastic recovery, Term structure, Volatility",
author = "Peter Christoffersen and Du Du and Redouane Elkamhi",
year = "2017",
month = may,
day = "1",
doi = "10.1287/mnsc.2015.2361",
language = "English",
volume = "63",
pages = "1341--1364",
journal = "Management Science",
issn = "0025-1909",
publisher = "Institute for Operations Research and the Management Sciences (I N F O R M S)",
number = "5",

}

RIS

TY - JOUR

T1 - Rare disasters, credit, and option market puzzles

AU - Christoffersen, Peter

AU - Du, Du

AU - Elkamhi, Redouane

PY - 2017/5/1

Y1 - 2017/5/1

N2 - We embed systematic default, procyclical recovery rates, and external habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and showthat a single set of structural parameters calibrated to the real economy can simultaneously explain several key empirical regularities in equity, credit, and options markets. Our model captures the empirical level and volatility of credit spreads, generates a flexible credit risk term structure, and provides a good fit to a century of observed spreads. The model also matches high-yield and collaterized debt obligation tranche spreads, equity market moments, and index option skewness. Finally, our model implies a time-varying relationship between bond and option prices that depends on the state of the economy and that explains the conflicting empirical evidence found in the literature.

AB - We embed systematic default, procyclical recovery rates, and external habit persistence into a model with a slight possibility of a macroeconomic disaster of reasonable magnitude. We derive analytical solutions for defaultable bond prices and showthat a single set of structural parameters calibrated to the real economy can simultaneously explain several key empirical regularities in equity, credit, and options markets. Our model captures the empirical level and volatility of credit spreads, generates a flexible credit risk term structure, and provides a good fit to a century of observed spreads. The model also matches high-yield and collaterized debt obligation tranche spreads, equity market moments, and index option skewness. Finally, our model implies a time-varying relationship between bond and option prices that depends on the state of the economy and that explains the conflicting empirical evidence found in the literature.

KW - Consumption risk

KW - Credit spreads

KW - Option skewness

KW - Stochastic recovery

KW - Term structure

KW - Volatility

UR - http://www.scopus.com/inward/record.url?scp=85018776399&partnerID=8YFLogxK

U2 - 10.1287/mnsc.2015.2361

DO - 10.1287/mnsc.2015.2361

M3 - Journal article

AN - SCOPUS:85018776399

VL - 63

SP - 1341

EP - 1364

JO - Management Science

JF - Management Science

SN - 0025-1909

IS - 5

ER -