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24 Results

A Simple Method for Extracting the Probability of Default from American Put Option Prices

Staff Working Paper 2020-15 Bo Young Chang, Greg Orosi
A put option is a financial contract that gives the holder the right to sell an asset at a specific price by (or at) a specific date. A put option can therefore provide its holder insurance against a large drop in the stock price. This makes the prices of put options an ideal source of information for a market-based measure of the probability of a firm’s default.

The “Too Big to Fail” Subsidy in Canada: Some Estimates

Staff Working Paper 2018-9 Patricia Palhau Mora
Implicit government guarantees of banking-sector liabilities reduce market discipline by private sector stakeholders and temper the risk sensitivity of funding costs. This potentially increases the likelihood of bailouts from taxpayers, especially in the absence of effective resolution frameworks.

On the Tail Risk Premium in the Oil Market

Staff Working Paper 2017-46 Reinhard Ellwanger
This paper shows that changes in market participants’ fear of rare events implied by crude oil options contribute to oil price volatility and oil return predictability. Using 25 years of historical data, we document economically large tail risk premia that vary substantially over time and significantly forecast crude oil futures and spot returns.

What Fed Funds Futures Tell Us About Monetary Policy Uncertainty

Staff Working Paper 2016-61 Jean-Sébastien Fontaine
The uncertainty around future changes to the Federal Reserve target rate varies over time. In our results, the main driver of uncertainty is a “path” factor signaling information about future policy actions, which is filtered from federal funds futures data.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Interest rates JEL Code(s): E, E4, E43, E44, E47, G, G1, G12, G13

Equity Option-Implied Probability of Default and Equity Recovery Rate

Staff Working Paper 2016-58 Bo Young Chang, Greg Orosi
There is a close link between prices of equity options and the default probability of a firm. We show that in the presence of positive expected equity recovery, standard methods that assume zero equity recovery at default misestimate the option-implied default probability.

What Does the Convenience Yield Curve Tell Us about the Crude Oil Market?

Staff Working Paper 2014-42 Ron Alquist, Gregory Bauer, Antonio Diez de los Rios
Using the prices of crude oil futures contracts, we construct the term structure of crude oil convenience yields out to one-year maturity. The crude oil convenience yield can be interpreted as the interest rate, denominated in barrels of oil, for borrowing a single barrel of oil, and it measures the value of storing crude oil over the borrowing period.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, International topics JEL Code(s): C, C5, C53, G, G1, G12, G13, Q, Q4, Q43


We present CoMargin, a new methodology to estimate collateral requirements for central counterparties (CCPs) in derivatives markets. CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants.

The Financialization of Food?

Staff Working Paper 2013-39 Valentina G. Bruno, Bahattin Buyuksahin, Michel A. Robe
Commodity-equity and cross-commodity return co-movements rose dramatically after the 2008 financial crisis. This development took place following what has been dubbed the “financialization” of commodity markets.

Estimating the Policy Rule from Money Market Rates when Target Rate Changes Are Lumpy

Staff Working Paper 2012-41 Jean-Sébastien Fontaine
Most central banks effect changes to their target or policy rate in discrete increments (e.g., multiples of 0.25%) following public announcements on scheduled dates. Still, for most applications, researchers rely on the assumption that the policy rate changes linearly with economic conditions and they do not distinguish between dates with and without scheduled announcements.
Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets, Interest rates JEL Code(s): E, E4, E43, E44, E47, G, G1, G12, G13

The Economic Value of Realized Volatility: Using High-Frequency Returns for Option Valuation

Many studies have documented that daily realized volatility estimates based on intraday returns provide volatility forecasts that are superior to forecasts constructed from daily returns only. We investigate whether these forecasting improvements translate into economic value added.