Estimating Structural Bond Pricing Models

Ericsson, Jan; Reneby, Joel

doi:10.2139/ssrn.268786

Cited by 37 publications

(39 citation statements)

References 38 publications

(19 reference statements)

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“…The fourth case describes a situation in which only equity prices matter, and there are no observation errors in equity prices. This corresponds to the situation described by Duan (1994), Duan, Gauthier, Simonato, and Zaanoun (2003) and Ericsson and Reneby (2005), and estimation can proceed via the CoV method.…”

Section: Possible Assumptions and Estimation Approachesmentioning

confidence: 99%

Estimating Structural Models of Corporate Bond Prices

Bruche

2019

World Scientific Reference on Contingent Claims Analysis in Corporate Finance

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One of the strengths of structural models (or firm-value based models) of credit (e.g. Merton, 1974) as opposed to reduced-form models (e.g. Jarrow and Turnbull, 1995) is that they directly link the price of equity to default probabilities, and hence to the price of corporate bonds (and credit derivatives). Yet when these models are estimated on actual data, the existence of data other than equity prices is typically ignored. This paper describes how all available price data (equity prices, bond prices, possibly credit derivative prices) can be used in estimation, and illustrates that using e.g. bond price data in addition to equity price data greatly improves estimates. In this context, the issue of possibly noisy data and/or model error is also discussed.

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Section: Possible Assumptions and Estimation Approachesmentioning

confidence: 99%

Estimating Structural Models of Corporate Bond Prices

Bruche

2019

World Scientific Reference on Contingent Claims Analysis in Corporate Finance

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“…We …rst show that the judge's vector of weights ; along with sharing rule (15), de…nes a unique reorganization plan c at (v; k). We then derive the analytic solution to the optimization problem (18)- (19) for all combinations of decisions by the followers, and all possible identities of the leader.…”

Section: Appendix Appendix A: Reorganization Plansmentioning

confidence: 99%

Resolution of Financial Distress Under Chapter 11

2012

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“…Whereas there have been many empirical studies of structural models, especially recently, based on corporate bond data, the empirical testing of these models using CDS spreads is quite limited. Such a testing is desirable especially given the recent empirical evidence based on the corporate bond market that existing structural models have difficulty either fitting corporate bond spreads (e.g., Jones, Mason, and Rosenfeld (1984), Lyden and Saraniti (2000), Delianedis and Geske (2001), Eom, Helwege, and Huang (2004), Arora, Bohn, and Zhu (2005) and Ericsson and Reneby (2005)) or explaining both spreads and default frequencies simultaneously (the so-called credit spread puzzle documented in Huang and Huang (2003)). If CDS spreads are considered to be a purer measure of credit risk than corporate bond spreads, then the existing structural models (purely default risk based) may perform better in capturing the behavior of CDS spreads than they do for corporate bond spreads.…”

Section: Introductionmentioning

confidence: 99%

Specification Analysis of Structural Credit Risk Models

Huang

Zhou

2008

FEDS

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In this paper we conduct a specification analysis of structural credit risk models, using term structure of credit default swap (CDS) spreads and equity volatility from high-frequency return data. Our study provides consistent econometric estimation of the pricing model parameters and specification tests based on the joint behavior of time-series asset dynamics and cross-sectional pricing errors. Our empirical tests reject strongly the standard Merton (1974) model, the Black and Cox (1976) barrier model, and the Longstaff and Schwartz (1995) model with stochastic interest rates. The double exponential jump-diffusion barrier model (Huang and Huang, 2003) improves significantly over the three models. The best one among the five models considered is the stationary leverage model of Collin-Dufresne and Goldstein (2001), which we cannot reject in more than half of our sample firms. However, our empirical results document the inability of the existing structural models to capture the dynamic behavior of CDS spreads and equity volatility, especially for investment grade names. This points to a potential role of time-varying asset volatility, a feature that is missing in the standard structural models.

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Estimating Structural Bond Pricing Models

Cited by 37 publications

References 38 publications

Estimating Structural Models of Corporate Bond Prices

Estimating Structural Models of Corporate Bond Prices

Resolution of Financial Distress Under Chapter 11

Specification Analysis of Structural Credit Risk Models

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