This paper presents a framework in which many structural credit risk models can be made hybrid by randomizing the default trigger, while keeping the capital structure intact. This produces random recovery rates negatively correlated with the default probability. The approach is implemented on a...

This paper analyzes a term structure model that allows for both stochastic correlation between underlying factors and an extended market price of risk specification. We show that significant improvement in bond fitting and portfolio performance is obtained by the model. However, the restriction...

This paper presents the most commonly used definition of credit spread forwards, discusses two alternative definitions and proposes one of these definitions as the standardized version that should be used in the future to prevent confusion. In addition, this paper gives an overview about the...

This paper extends the baseline Merton (1974) structural default model, which is intended for static debt spreads, to a setting with dynamic debt, where leverage can be ratcheted up as well as written down through pre-specified exogenous policies. We provide a different and novel solution...

In this article we define a multi-factor equity-interest rate hybrid model with non-zero correlation between the stock and interest rate. The equity part is modeled by the Heston model [Heston-1993] and we use a Gaussian multi-factor short rate process [Brigo,Mercurio-2007; Hull-2006]. By...

The paper models and analyses the dynamics of credit spread curves based on ratings over the period from 2004 to 2021. Using more than 1.5 million data points of individual bonds, instead of using index data, monthly asset swap spread (ASW) curves are constructed for all rating levels. The paper...

This paper presents a new approach, based on the Merton model, to decomposing corporate bond spreads into the expected loss, bond risk premium and liquidity premium components. The approach focuses on establishing the bond risk premium using the equity risk premium and the hedge ratio, which are...

A new concept of credit spread for defaultable bond pricing is introduced in this paper. When combined with the corresponding survival-based pricing model, it allows fixed income portfolio consists of bonds and credit default swaps to be managed consistently in terms of default and credit spread...

This paper explores the dynamic relationship between stock market implied credit spreads, CDS spreads, and bond spreads. A general VECM representation is proposed for changes in the three credit spread measures which accounts for zero, one, or two independent cointegration equations, depending...

Do credit spreads signal firm investment opportunities just like Tobin's q? Because both credit spreads and Tobin's q are market prices, they should contain similar information about the firm. I develop an investment model in which an analytical relation is established between the marginal q and...