We propose a reduced form model for default that allows us to derive closed-form solutions to all the key ingredients in credit risk modeling: risk-free bond prices, defaultable bond prices (with and without stochastic recovery) and probabilities of survival.We show that all these quantities can...

There has been increasing support in the empirical literature that both the probability of default (PD) and the loss given default (LGD) are correlated and driven by macroeconomic variables. Paradoxically, there has been very little effort from the theoretical literature to develop credit risk...

This article presents a modification of Merton's (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the U.S. over the period December 1996 through...

This paper proposes a simple structural model to estimate the term structure of sovereign spreads and the implied default probability of a selected group of emerging countries, which accounts for more than 50% of the J. P. Morgan EMBIG index.The real exchange rate dynamics, modeled as a pure...

This article integrates an earnings-based capital structure model into a simple real options framework to analyze the effects of managerial optimism and overconfidence on the interaction between financing and investment decisions. Several empirical implications follow from solving the model....

Recent literature focuses on the systematic and specific components of credit risk (Dichev [1998], Wilson [1998], Jarrow, Lando amp; Yu [2001]). It is currently assumed, at least implicitly, that financial data are all subject to one latent systematic factor (Jarrow, Lando amp; Yu [2001], Lucas,...

This paper models the default probabilities and credit spreads for select Indian firms in the Black-Scholes-Merton framework. Counter to previous research, we show that the objective (or 'real') probability estimates are higher than the risk-neutral estimates over the sample period. However, the...

We value synthetic CDO tranche spreads, index CDS spreads, k-th-to-default swap spreads and tranchelets in an intensity-based credit risk model with default contagion. The default dependence is modelled by letting individual intensities jump when other defaults occur. The model is reinterpreted...

This paper applies the methodology developed by Forte (2008) to extract the implied default point in the premium on credit default swaps (CDS). As well as considering a more extensive international sample of corporations (96 US, European and Japanese companies) and a longer time interval...

When identifying relative value opportunities across credit and equity markets, the arbitrageur faces two major problems, namely positions based on model misspecification and mismeasured inputs. Using credit default swap data, this paper addresses both concerns in a convergence-type trading...