Advanced Search
MyIDEAS: Login

A Comparative Study of Structural Models of Corporate Bond Yields: An Exploratory Investigation

Contents:

Author Info

  • Anderson, Ronald

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); CEPR)

  • Sundaresan, Suresh

    (Columbia University, Graduate School of Business)

Registered author(s):

    Abstract

    This paper empirically compares a variety of firm-value-based models of contingent claims. We formulate a general model which takes the perpetual coupon bond models of Merton (1974), Leland (1994) and Anderson, Sundaresan and Tychon (1996), as well as some immediate generalizations thereof, as special cases. We estimate these using aggregate time series data for the US corporate bond market, monthly, from August 1970 through December 1996. The data are average yields for industrial corporate bonds rated BBB, Treasury yields, leverage measures derived from the Flow of Funds Accounts, interest coverage measures derived from the National Income Accounts, and volatility measures derived from the stock market. In the basic specification with constant default free rates, we find that models with endogenous bankruptcy barriers (the Leland and the Anderson, Sundaresan and Tychon models) fit quite well. Thus, in these models, variations of leverage and asset volatility are found to account for much of the time-series variations of observed corporate yields. We then use the estimates to calculate the implied probability of default within N years. We find under plausible assumptions on the market risk-premium for levered firms that the models produce default probabilities for 5 years or more which are in line with the historical experience reported by Moodys.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. 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://sites.uclouvain.be/econ/DP/IRES/9909.pdf
    Download Restriction: no

    Bibliographic Info

    Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 1999009.

    as in new window
    Length: 32
    Date of creation: 01 Jul 1998
    Date of revision: 00 Jan 1999
    Handle: RePEc:ctl:louvir:1999009

    Contact details of provider:
    Postal: Place Montesquieu 3, 1348 Louvain-la-Neuve (Belgium)
    Fax: +32 10473945
    Email:
    Web page: http://www.uclouvain.be/ires
    More information through EDIRC

    Related research

    Keywords: Contingent Claims Analysis; Corporate Bonds; Credit Risk;

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    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.:
    as in new window
    1. Benjamin M. Friedman, 1985. "Corporate Capital Structures in the United States," NBER Books, National Bureau of Economic Research, Inc, number frie85-1, October.
    2. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
    3. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:ctl:louvir:1999009. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne DAVISTER-LOGIST).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.