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Estimating Structural Bond Pricing Models

Author

Listed:
  • Jan Ericsson

    (McGill University, Montreal
    Stockholm Institute for Financial Research)

  • Joel Reneby

    (Stockholm School of Economics)

Abstract

A difficulty that arises when implementing structural bond pricing models is the estimation of the value and risk of the firm's assets, neither of which is directly observable. We perform a simulation experiment to evaluate a maximum likelihood method applicable to this problem. Contrasting the performance of the maximum likelihood estimators to that of estimators traditionally used in academia and industry, we find strong support for the maximum likelihood approach. In fact, the inefficiency of the traditional estimator may help explain the failure of past attempts to implement structural bond pricing models.

Suggested Citation

  • Jan Ericsson & Joel Reneby, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
    • Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:707-706
    DOI: 10.1086/427644
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