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A down-and-out exchange option model with jumps to evaluate firms' default probabilities in Brazil

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  • Barbedo, Claudio Henrique da Silveira
  • Lemgruber, Eduardo Facó
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    Abstract

    We develop a tractable structural model to estimate a firm's default probability by modeling its asset and debt behavior. The model incorporates jump factors. For a set of Brazilian large corporations, we compare the structural model results to the default probabilities predicted by a survival analysis applied to the Central Bank debt information database. Our model outperforms other structural models. In a last step, we use a firm's sector failure probabilities to calibrate the model. This process is executed by adjusting the model jump volatility and it helps to explain the differences between debt and equity market failure probabilities.

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    File URL: http://www.sciencedirect.com/science/article/B6W69-4WK3YKG-1/2/11164c2d56436bfd4b685d5125addf03
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    Bibliographic Info

    Article provided by Elsevier in its journal Emerging Markets Review.

    Volume (Year): 10 (2009)
    Issue (Month): 3 (September)
    Pages: 179-190

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    Handle: RePEc:eee:ememar:v:10:y:2009:i:3:p:179-190

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    Web page: http://www.elsevier.com/locate/inca/620356

    Related research

    Keywords: Default probability Equity market Debt market Option;

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    Cited by:
    1. Jacques, Sébastien & Lai, Van Son & Soumaré, Issouf, 2011. "Synthetizing a debt guarantee: Super-replication versus utility approach," International Review of Financial Analysis, Elsevier, vol. 20(1), pages 27-40, January.

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