Research seminar: Prof. Robert Dittmar, Ph.D. (Michigan Ross)
Speaker: Prof. Robert Dittmar, Ph.D. (Stephen M. Ross School of Business, University of Michigan)
Title: Cross-Market and Cross-Firm Effects in Implied Default Probabilities and Recovery Values
Abstract: We propose a novel method of estimating default probabilities for firms using equity option data. The resulting default probabilities are significantly correlated with estimates of default probabilities extracted from CDS spreads, as well as significantly and sensibly related to firm characteristics and ratings categories. We also show that the difference between CDS spreads and option-implied default probabilities, which should contain information about recovery rates, varies across sector and with business conditions. Finally, we present evidence that the relation between CDS spreads and option-implied default probabilities is strong; in addition, we cannot reject the hypothesis that, in aggregate, the coefficient on the default probability is one. An inferred recovery rate, after controlling for liquidity effects, also varies through time and is related to underlying business conditions.
Faculty, graduate students, and researchers at Goethe University as well as interested researchers from the area are cordially invited to attend at no cost.
Registration is not required!