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Valuing defaultable bonds: an excursion time approach

Nardon, Martina - EconWPA - 2005

Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical...

Persistent link: https://www.econbiz.de/10005561733

Specification Analysis of Option Pricing Models Based on Time- Changed Levy Processes

Huang, Jingzhi; Wu, Liuren - EconWPA - 2004

We analyze the specifications of option pricing models based on time- changed Levy processes. We classify option pricing models based on the structure of the jump component in the underlying return process, the source of stochastic volatility, and the specification of the volatility process...

Persistent link: https://www.econbiz.de/10005077041

Static Hedging of Standard Options

Carr, Peter; Wu, Liuren - EconWPA - 2004

We consider the hedging of options when the price of the underlying asset is always exposed to the possibility of jumps … hedge in the presence of jumps cannot be improved upon by increasing the rebalancing frequency. In contrast, the superior … empirical support for the existence of jumps of random size in the movement of the S&P 500 index. We also find that the …

Persistent link: https://www.econbiz.de/10005413226

Idiosyncratic Risk, Systematic Risk and Stochastic Volatility: An Implementation of Merton’s Credit Risk Valuation

Hayette, Gatfaoui - EconWPA - 2004

We extend the credit risk valuation framework introduced by Gatfaoui (2003) to stochastic volatility models. We state a general setting for valuing risky debt in the light of systematic risk and idiosyncratic risk, which are known to affect each risky asset in the financial market. The option...

Persistent link: https://www.econbiz.de/10005134708

Optimal Capital Structure and Industry Dynamics

Miao, Jianjun - EconWPA - 2003

This paper presents an equilibrium model of industry dynamics and capital structure decisions. The unique stationary equilibrium is derived in closed-form. The analysis reveals that the interaction between capital structure and production decisions influences the stationary distribution of...

Persistent link: https://www.econbiz.de/10005134424

The U-shaped Investment Curve: Theory and Evidence

Cleary, Sean; Povel, Paul; Raith, Michael - EconWPA - 2003

This paper examines how the investment of financially constrained firms varies with their level of internal funds. We develop a theoretical model of optimal investment under financial constraints. Our model endogenizes the costs of external funds and allows for negative levels of internal funds....

Persistent link: https://www.econbiz.de/10005413170

Liquidation Triggers and the Valuation of Equity and Debt

Galai, Dan; Raviv, Alon; Wiener, Zvi - EconWPA - 2003

Net-worth covenants, as introduced by Black and Cox (1976), provide the firm’s bondholders with the right to force reorganization or liquidation if the value of the firm falls below a certain threshold. In the event of default, however, many bankruptcy codes stipulate an automatic stay of...

Persistent link: https://www.econbiz.de/10005561605

Are Bank Ratings Coherent with Bank Default Probabilities in Emerging Market Economies ?

Godlewski, Christophe - EconWPA - 2004

In this paper we investigate the coherence between bank ratings and default probability in emerging market economies using scoring and mapping techniques. In order to achieve its disciplining role, the rating should be coherent with the default risk it summarizes and disseminate. This issue is...

Persistent link: https://www.econbiz.de/10005076980

From Fault Tree to Credit Risk Assessment: A Case Study

GATFAOUI, Hayette - EconWPA - 2005

Reliability has been largely applied to industrial systems in order to study the various possibilities of systems’ failure. The goal is to establish the chain of events leading to any system’s failure, namely the top event. Looking for the minimal paths leading to any system’s fault allows...

Persistent link: https://www.econbiz.de/10005407916

An empirical analysis of structural models of corporate debt pricing

Teixeira, Joao C. A. - EconWPA - 2005

This paper tests empirically the performance of three structural models of corporate bond pricing, namely Merton (1974), Leland (1994) and Fan and Sundaresan (2000). While the first two models overestimate bond prices, the Fan and Sundaresan model reveals an extremely good performance. When...

Persistent link: https://www.econbiz.de/10005076981

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