Campi, Luciano Polbennikov, Simon Sbuelz, Alessandro (Tilburg University, Center for Economic Research)
Abstract
Unlike 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 di usively 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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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number
27.
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