K. Ilinski: Key results in financial economics

First no-arbitrage market model for relative pricing of equity and credit derivatives (Credit Risk Reversal)

For thirty years the field was dominated by structural models (Merton-style) which describe firms dynamics as a jump-diffusion process and then price credit and equity derivatives separately as options on firms assets. There is no tradable (arbitrage) mechanism to enforce the relationship which severely limits its practical applications.

Credit Risk Reversal (CRR) is the first truly no-arbitrage model for joint pricing credit and equity (old put vs bond trade is a particular case of CRR). It prescribes trading strategy to enforce the relationship and to dynamically hedge credit derivatives with equity options. see more ... >>

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