Isn't it just a version of the CreditGrades or credit-to-equity model?For delta = 0, you get the standard CreditGrades model.Although consistent with the equity skew, this model is known to produce too small default probabilities for short maturities not consistent with the market.

Also a related article from Bloomberg:Dividends Falling Means S&P 500 Is Still Expensive

I didn't see anything conclusive in this analysis... correlation does not imply causation!

<t>QuoteOriginally posted by: Traden4AlphaYes, capital structure will affect this. The volatility of the balance sheet (i.e., asset prices and liabilities) as well as the integral of the volatilities of the income statement (i.e., revenues and costs) will determine the probability that asset levels ...

<t>> In any case, Dave's idea of using prices from other instruments is really good for estimating the probability of bankruptcy.The default probability implied from CDS and bonds strongly depends on the assumed recovery on the debt. The default probability implied from option prices depend on the a...

<t>I see. Under Heston and, generally, in any SV model where the spot is a log-normal type process, the distribution of V does not depend on the spot-var correlation parameter (important: V is the instanteneous variance, not the implied volatility squared). Pricing Vol swap under Heston is similar t...

<t>You are welcome.I don't quite follow you. By ATMF, do you mean the expected volatility of the spot price or the expected volatility of the realized variance? In the former case, it does depend on the spot-variance correlation parameter, in the latter it does not. But, in my opinion, you should us...

<r>> I was using K = 50% ... 150% and it matches using 0... 200% (around 5vol difference on the wing.I guess the vol of vol is extreme in this evniroment so that the range of replicating strikes should be wide. It also shows that it is virtually impossible to risk-manage var swaps using the replicat...

I did this kind of analysis in the past and got close results between the two cases.Check your implementation of 1).

<r>I suggest you check out hese papers:<URL url="http://www.math.nyu.edu/research/carrp/papers/pdf/jbfcds.pdfhttp://math.ut.ee/~spartak/papers/seppthesis.pdfAlthough"><LINK_TEXT text="http://www.math.nyu.edu/research/carrp/ ... dfAlthough">http://www.math.nyu.edu/research/carrp/papers/pdf/jbfcds.pdf...

<t>for short position in a vanilla call / put option (the option gamma has always the same sign) you don't loose money if|Spot(t)-Spot(0)|<Spot(0)*sqrt(t)*SigmaImpliedwhere SigmaImplied is the volatility you use to delta-hedge at time 0.Just do Taylor series expansion of your hedging portfolio and u...

<t>QuoteOriginally posted by: CuchulainnQuote1) 0.3412572) 0.357819I use a direct computation of the noncentral chi function as a series of incomplete gamma function.How do you determine the effects of round-off errors in all of these computations? Are the results really correct or do solutions give...

What exactly are you trying to price? The survival probability and the default time density are known for CIR jump-to-default model so I don't see a need for approximations to price CDS, CDS options, and equity options in this model.

Yes, I agree

<r>Here you can find the Fourier-transformed solution for joint density of the log-spot, its instanteneous variance and the realized variance in the Heston model with price an volatility jumps. See page 47 for general solution and page 69 for two-factor solutions, there is a plot of the joint densit...