In this paper, we extend the framework of Leland's 94 by examining corporate debt, equity and firm values with jump-difffusion processes. We choose two kinds of jumps such as the uniform and double exponential jumps to model the distribution of the log jump sizes. By this choice, we are able to...

This paper studies game-type credit default swaps that allow the protection buyer and seller to raise or reduce their respective positions once prior to default. This leads to the study of an optimal stopping game subject to early default termination. Under a structural credit risk model based...

We present the non-Gaussian extension of the traditional Merton framework, which takes into account slowly relaxing fluctuations of the volatility of the firm's market value of financial assets. The minimal version of the model depends on the Tsallis entropic parameter q and the generalized...

The empirical tests of traditional structural models of credit risk tend to indicate that such models have been unsuccessful in the modeling of credit spreads. To address these negative findings some authors introduce single-factor stochastic volatility specifications and/or jumps.In the yield...

We analyse the effect of mean-reverting cash flows on the costs of shareholder-bondholder conflicts arising from partially debt-financed investments. In a partial equilibrium setting we find that such agency costs are significantly lower under mean-reverting (MR) dynamics, when compared to the...

We study saddlepoint approximations to the tail-distribution for different credit portfolio losses in continuous time intensity based models which stochastic recoveries, under conditional independent homogeneous settings. In such models, conditional on the filtration generated by the individual...

Building on recent work incorporating recovery risk into structural models we consider the Black-Cox model with an added recovery risk driver. The recovery risk driver arises naturally in the context of imperfect information implicit in the structural framework. This leads to a two-factor...

We present a stochastic simulation model for estimating forward-looking corporate probability of default and loss given default. We formulate the model in a discrete time frame, apply capital-budgeting techniques to define the relationships that identify the default condition, and solve the...

In this work we incorporate recovery risk into Merton's original credit risk model by introducing a separate risk driver for the recovery process and rationalize this new model within a "partial information" perspective. We show that while adding the recovery risk driver has no impact on...