This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Bond Pricing with Default Risk

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Jesus Saa-Requejo (Banco Bilbao Vizcaya)
Pedro Santa-Clara (Anderson School of Management)
Abstract

We offer a new model for pricing bonds subject to default risk. The event of default is remodeled as the first time that a state variable that captures the solvency of the issue goes below a certain level. The payoff to the bond in case of default is a constant fraction of the value of a security with the same promised payoffs but without the risk of default. We show that our model is very tractable under different models of interest rate risk and of the interaction between default risk and interest rate risk, with closed-form solutions for corporate bond prices in special cases. The model is seen to produce term structures of default yield spreads and forward spreads with more reasonable properties than other models that have recently been proposed. We illustrate the issue of our model by estimating its parameters and backing up both the default writedown and the state variable that governs default risk from a panel data set of bond prices issued by RJR Nabisco.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://repositories.cdlib.org/cgi/viewcontent.cgi?article=1127&context=anderson/fin
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number 1127.

Download reference. The following formats are available: HTML (with abstract), plain text (with abstract), BibTeX, RIS (EndNote, RefMan, ProCite), ReDIF
Length:
Date of creation: 23 Mar 1997
Date of revision:
Handle: RePEc:cdl:anderf:1127

Note: oai:cdlib1:anderson/fin-1127
Contact details of provider:
Postal: 110 Westwood Plaza, Los Angeles, CA. 90095
Web page: http://repositories.cdlib.org/anderson/fin/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Christopher F. Baum).

Related research
Keywords:

Other versions of this item:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Briys, Eric & de Varenne, Fran?ois, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June. [Downloadable!]
  2. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November. [Downloadable!] (restricted)
  3. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  4. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January. [Downloadable!] (restricted)
  5. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July. [Downloadable!] (restricted)
  6. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March. [Downloadable!] (restricted)
  7. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July. [Downloadable!] (restricted)
    Other versions:
  8. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  9. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 481-523.
  10. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May. [Downloadable!] (restricted)
  11. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May. [Downloadable!] (restricted)
    Other versions:
  12. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-56, June. [Downloadable!] (restricted)
  13. Mark Grinblatt, 2002. "An Analytic Solution for Interest Rate Swap Spreads," Yale School of Management Working Papers ysm39, Yale School of Management. [Downloadable!]
    Other versions:
  14. Ho, Thomas S Y & Lee, Sang-bin, 1986. " Term Structure Movements and Pricing Interest Rate Contingent Claims," Journal of Finance, American Finance Association, vol. 41(5), pages 1011-29, December. [Downloadable!] (restricted)
  15. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gordon Delianedis & Robert Geske, 2001. "The Components of Corporate Credit Spreads: Default, Recovery, Tax, Jumps, Liquidity, and Market Factors," University of California at Los Angeles, Anderson Graduate School of Management 1025, Anderson Graduate School of Management, UCLA. [Downloadable!]
  2. Kanak Patel & Prodromos Vlamis, 2006. "An Empirical Estimation of Default Risk of the UK Real Estate Companies," The Journal of Real Estate Finance and Economics, Springer, vol. 32(1), pages 21-40, February. [Downloadable!] (restricted)
  3. Reneby, Joel & Ericsson, Jan, 2001. "The Valuation of Corporate Liabilities: Theory and Tests," Working Paper Series in Economics and Finance 445, Stockholm School of Economics, revised 19 Dec 2002. [Downloadable!]
  4. Hugues Pirotte, 1999. "Implementing a Structural Valuation Model of Swap Credit-Sensitive Rates," Working Papers CEB 99-001.RS, Université Libre de Bruxelles, Solvay Brussels School of Economics and Management, Centre Emile Bernheim (CEB). [Downloadable!]
  5. Ericsson, Jan & Reneby, Joel, 2003. "Valuing Corporate Liabilities," SIFR Research Report Series 15, Institute for Financial Research. [Downloadable!]
  6. Jan Ericsson, Joel Reneby, 1998. "A framework for valuing corporate securities," Applied Mathematical Finance, Taylor and Francis Journals, vol. 5(3-4), pages 143-163, September. [Downloadable!] (restricted)
    Other versions:
  7. Marcel Peter & Martín Grandes, 2005. "How Important Is Sovereign Risk in Determining Corporate Default Premia? The Case of South Africa," IMF Working Papers 05/217, International Monetary Fund. [Downloadable!]
Statistics
Access and download statistics

Did you know? Cannot find something on IDEAS? Encourage the publisher to index it! Instructions.

This page was last updated on 2009-10-23.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.