This note provides a simple proof of the necessity of the transversality condition for the differentiable reduced-form model. The proof uses only an elementary perturbation argument without relying on dynamic programming. The proof makes it clear that, contrary to common belief, the necessity of...

Based on a joint three – factor a¢ ne model, we estimate the term structure of interest rates and default spreads for Uruguay using the reduced - form approach developed by Du¢ e and Singleton. We …nd that Uruguayan average term structure was negatively sloped between 1997 and 2003, as...

A closed-form formula for the analysis of defaultable bonds is essential for market practitioners and financial researchers. In order to make the model more reasonable without loss of generality, it is necessary to specify the stochastic processes of the default-free short interest rate, the...

Purpose This paper aims to provide an overview, a classification of existing research groups for correlated default models using a reduced-form method and an identification of future research opportunities in the field. Design/methodology/approach A systematic literature review is used for the...

Premiums collected when warrants are issued become part of a firm's capital and are taken into account in the valuation of a company. In this paper formulae are developed to fairly value warrants in the case where multiple warrant issues are outstanding, including consideration of issue premiums...

Purpose The purpose of this paper is to estimate the effects of liquidity on corporate bond spreads. Design/methodology/approach Using a systematic liquidity factor extracted from the yield spreads between on- and off-the-run Treasury issues as a state variable, the authors jointly estimate the...