• Equity Derivatives

    On model uncertainty in credit-equity models

    Credit-equity models are often used to infer equity derivative prices from observed prices of credit instruments referring to the same company, or vice versa. There is a huge degree of model freedom, hence model uncertainty, when doing this. The introduction of reasonable model axioms that diminishes this model uncertainty is more art than science. The present note investigates this model uncertainty and aims to provide a feeling for the effect of commonly made assumptions.