Merton's Model, Credit Risk, and Volatility Skews

by John Hull of the University of Toronto,
Izzy Nelken of Super Computer Consulting Incorporated, and
Alan White of the University of Toronto

September 2004

Abstract: In 1974 Robert Merton proposed a model for assessing the credit risk of a company by characterizing the company's equity as a call option on its assets. In this paper we propose a way the model's parameters can be estimated from the implied volatilities of options on the company's equity. We use data from the credit default swap market to compare our implementation of Merton's model with the traditional implementation approach.

Published in: Journal of Credit Risk, Vol. 1, No. 1, (Winter 2004/05), pp. 3-28.

Download paper (333K PDF) 38 pages

[Home] [Credit Modeling Papers]

[ Home ] [ Up ]

Please contact me with problems or suggestions.
Copyright © 2000-2008 DefaultRisk.com
Last modified: October 12, 2008