Stock price default boundary: A Black-Cox model approach

Abstract

In this paper, we incorporate the information from Credit Default Swap (CDS) and options markets to extract the relative default boundary at the stock price level. We propose a reduced-form Black-Cox Model (BCM) with a Deterministic Linear Function (DLF) to extract default information from the CDS and options market to gauge the default boundaries. Using S&P 500 index, CDS, and options data from 2002 to 2017, we extract default boundaries for S&P 500 index via the Unscented Kalman Filter (UKF). Our results suggest that our method performs well when compared with the historical mean relative default boundaries and the recent Unit Recovery Claim (URC)-based default boundaries.