Default Risk and Option Returns

• 成果类型: Article; Early Access
• 署名作者: Vasquez, Aurelio; Xiao, Xiao
• 署名单位: Instituto Tecnologico Autonomo de Mexico; City St Georges, University of London
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2023.4796
• 发表日期: 2023
• 关键词: delta-hedged option returns; default risk; Variance risk premium; volatility; capital structure model

摘要

This paper studies the effects of default risk on expected equity option returns. In the cross-section, expected delta-hedged equity option returns have a negative relation with default risk measured by credit ratings or default probability. In the time series, credit rating downgrades (upgrades) lead to a decrease (increase) in the firm's delta-hedged option return. Our results are consistent with a stylized capital structure model in which the negative relation between option returns and default risk is driven by firm leverage and asset volatility.