Assessing Credit with Equity: A CEV Model with Jump to Default
AbstractUnlike in structural and reduced-form models, we use equity as a liquid and observable primitive to analytically value corporate bonds and credit default swaps.Restrictive assumptions on the .rm.s capital structure are avoided.Default is parsimoniously represented by equity value hitting the zero barrier either diffusively or with a jump, which implies non-zero credit spreads for short maturities.Easy cross-asset hedging is enabled.By means of a tersely speci.ed pricing kernel, we also make analytic credit-risk management possible under systematic jump-to-default risk.
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Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2005-27.
Date of creation: 2005
Date of revision:
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Equity; Corporate Bonds; Credit Default Swaps; Constant-Elasticity-of-Variance (CEV) Diffusion; Jump to Default;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-03-06 (All new papers)
- NEP-CFN-2005-03-06 (Corporate Finance)
- NEP-FIN-2005-03-06 (Finance)
- NEP-FMK-2005-03-06 (Financial Markets)
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