Options market information and the pricing of corporate bonds and credit default swaps

Using the compound options approach with stock options market information, we are able to estimate a firm's asset value and asset volatility more accurately. These "options market implied" values can then be used as input for a Merton style structural credit risk pricing model to calculate corporate bond yield spreads or credit default swap spreads. This paper shows that the aforementioned method is superior to the traditional methods in generating yield spreads that match data.