Estimating Structural Models Of Corporate Bond Prices

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Estimating Structural Models Of Corporate Bond Prices

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Max Bruche () (CEMFI, Centro de Estudios Monetarios y Financieros)

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Max Bruche

Abstract

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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Paper provided by CEMFI in its series Working Papers with number wp2006_0610.

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Date of creation: Jun 2006
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Handle: RePEc:cmf:wpaper:wp2006_0610

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This paper has been announced in the following NEP Reports:

NEP-ALL-2006-10-07 (All new papers)
NEP-FMK-2006-10-07 (Financial Markets)

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.:

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Other versions:
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Other versions:
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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.)

Javier Díaz-Giménez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms In The U.S.: A Boon For The Income Poor," Working Papers wp2006_0611, CEMFI. [Downloadable!]
Other versions:
- Díaz-Giménez, Javier & Pijoan-Mas, Josep, 2006. "Flat Tax Reforms in the US: A Boon for the Income Poor," CEPR Discussion Papers 5812, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
- Javier Diaz-Gimenez & Josep Pijoan-Mas, 2006. "Flat Tax Reforms in the U.S.: a Boon for the Income Poor," Computing in Economics and Finance 2006 400, Society for Computational Economics. [Downloadable!]

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