In this paper, we modify the extendible debts model proposed in Longstaff (1990) to help relieve the moral hazard problem induced in the original model. In Longstaff¡¦s model, extending the maturity of the defaulted debts gives the borrower an incentive to default even if the borrower is...

In this paper, we modify the extendible debts model proposed in Longstaff (1990) to help relieve the moral hazard problem induced in the original model. In Longstaff¡¦s model, extending the maturity of the defaulted debts gives the borrower an incentive to default even if the borrower is...

In Markov-switching regression models, we use Kullback-Leibler (KL) divergence between the true and candidate models to select the number of states and variables simultaneously. In applying Akaike information criterion (AIC), which is an estimate of KL divergence, we find that AIC retains too...