We present a dynamic model for the joint evolution of the balance sheet, equity stock price, and the credit default spread (CDS). We illustrate why the structural default model cannot explain the dynamics of CDS rates. We then introduce the credit risk-premium to model spikes in CDS rates during...

The finance literature looks at a number of factors to explain risk premia in corporate debt, such as liquidity effects, jump-to-default risk, and contagion risk. Stochastic recovery rates as a source of systematic risk have not received much attention so far, most likely due to the difficulties...

During the recent sovereign debt crisis, the European Banking Authority conducted two stress tests on European banks in order to gauge their capital needs, core Tier-1 ratios and ratios of resilience to adverse shocks. We assess the informational content of the disclosure of the stress test...