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This paper by Hull, Nelken and White uses implied volatilities in structural credit risk models to back out a market-implied leverage ratio. CreditGrades has a similar implementation using equity derivatives as well. My goal is to use these approaches to back out firm leverage.

I have tried to replicate the CreditGrades Approach using their Case C Approach. I notice, however, that the leverage ratio derived from the implied put volatilities is extremely volatile, and very small changes in the strike price can produce massive fluctuations in the leverage. The leverage ratio is also occasionally negative.

Does anybody have any experience in implementing this approach? Are these potentially normal/known issues with the model or is it likely that my implementation is flawed? I can upload my spreadsheet if need be.

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