Recent literature has highlighted joint movements between Credit Default Swap (CDS) spread and stock price volatility (or stock option implied volatility). The impact of the credit risk factor on out-of-money stock option price is documented. Some dynamically consistent framework have been proposed for the joint evaluation and estimation of stock options and CDS spreads written on the same reference name in order to integrate both market information.

This thesis provides a new methodology for joint evaluation of stock option price, CDS spread and bond prices. A two-step Monte Carlo procedure is employed for calibration to the term structure of implied volatilities. An approximated default intensity rate under the reduced form model is employed for credit risk calibration. A closed-form of zero coupon bond price under Vasicek model is employed for interest rate risk calibration. Combinations of these calibration methods allow a robust and efficient estimation for the joint dynamics of risk factors from the equity market, the credit market and the bond market. Our investigation discloses the importance of cross-market information to fit the implied volatility surfaces by means of a joint dynamic model which include market risk, credit risk and the interest risk.

[1] Black, F. and J. Cox (1976) Valuing corporate securities: some effects of bond indenture provisions. Journal of Finance, 31:351-367.
[2] Berndt, A. and A. Ostrovnaya (2007). Information flow between credit default swap, option and equity markets. Working paper, Tepper Schoolof Business, Carnegie Mellon University
[3] Brigo, D. and A. Aurélien (2005) Credit default swap calibration and derivatives pricing with the SSRD stochastic intensity model. Finance Stochast (9),29–42.
[4] Brigo, D. and M. Morini (2005) CDS market formulas and models. Working paper,Banca IMI.
[5] Carr, P. and L. Wu (2010). Stock options and Credit Default Swaps: a joint framework for valuation and estimation. Journal of Financial Econometrics 8 (4), 409-449.
[6] Chapovsky, A. , A. Rennie and P. A. C. Tavares.(2006). Stochastic intensity modelling for structured credit exotics. International Journal of Theoretical and Applied Finance, 10, 4: 633-652
[7] Chen, T.Y. (2010) Corrections to Fourier transform method for nonparametric estimation of volatility with applications in risk management, Master thesis, National Tsing Hua Unersity.
[8] Collin-Dufresne, P. , R. S. Goldstein and F. Yang.(2010) On the relative pricing of long maturity S&P 500 index options and CDX tranches. Working Paper 15734, National Bureau of Economic Research.
[9] Fouque, J.P. and Han,C.H. (2008). Asymmetric Variance Reduction for Pricing American Options, Mathematical Modeling and Numerical Methods in Finance, Volume 15: Special Volume.
[10] Fouque, J.P. and Han, C.H. (2007) A Martingale Control Variate Method for Option Pricing with Stochastic volatility, ESAIM Probability & Statistics, 11, 40-54
[11] Jeanblanc,M. and L.C. Yann (2007) Reduced form modeling for credit risk. Working paper, Université d'Évry Val d'Essonne.
[12] Leland, H.E. (1994) Corporate debt value, bond covenants and optimal capital structure. Journal of Finance, 49:1213-1252.
[13] Longstaff, F. and E. S. Schwartz (1995) A simple approach to valuing risky fixed and floating rate debt. Journal of Finance, 50:789-819.
[14] Longstaff, F. and E. S. Schwartz (2001) Valuing American Options by Simulation: A Simple Least-Squares Approach, Rev. Financial Stud., 14,113V147.
[15] Malliavin, P. and M. E. Mancino (2002) Fourier series method for measurement of multivariate volatilities. Finance and Stochastics, 6: 49-61
[16] Merton, R. C. (1974). On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance 29: 449–470.
[17] Norden L. and M. Weber (2004) Informational efficiency of credit default swap and equity markets: the impact of credit rating announcements. Journal of Banking and Finance 2004; 28 (11): 2813-2843.
[18] Norden L. and M. Weber (2009) The co-movement of credit default swap, bond and equity markets: an empirical analysis. European Financial Management 15: 529-562.
[19] ¨Omhans, B. (2005) Credit dfault swaps and equity prices:the iTRAXX CDS index market. Working paper.
[20] Skinnera, F. S. and T. G. Townend (2002). An empirical analysis of credit default swaps. International Review of Financial Analysis (11), 297–309.
[21] Yeo, Y.M. (2011) Monte Carlo calibration of implied volatility surface under multi-factor stochastic volatility models, Master Thesis, National Tsing Hua University.
[22] Zhang, B.Y and H. Z. (2009). Explaining credit default swap spreads with the equity volatility and jump. The Review of Financial Studies , 22 (12),5100-5131.
[23] Zhou, C. (2001) An analysis of default correlations and multiple defaults. Review of Financial Studies, 14(2):555-576.