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A structural model of corporate bond pricing with co-ordination failure

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  • Max Bruche

Abstract

It has been suggested (Morris, Shin 2001) that co-ordination failure between bondholders could produce an effect that would explain the systematic mispricing of corporate debt produced by the Merton (1974) framework. In essence, fear of premature foreclosure by other debtors can lead to pre-emptive action, lowering the value of debt. This paper presents a continuous-time bond pricing model integrating this effect, and shows that co-ordination failure can indeed cause bonds to be traded at a discount.

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File URL: http://eprints.lse.ac.uk/24930/
File Function: Open access version.
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Bibliographic Info

Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24930.

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Length: 33 pages
Date of creation: Mar 2002
Date of revision:
Handle: RePEc:ehl:lserod:24930

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  1. 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.
  2. Jan Ericsson & Joel Reneby, 1998. "A framework for valuing corporate securities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 143-163.
  3. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Society for Financial Studies, vol. 9(1), pages 37-68.
  4. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-25, July.
  5. Geske, Robert, 1977. "The Valuation of Corporate Liabilities as Compound Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(04), pages 541-552, November.
  6. Anderson, Ronald & Sundaresan, Suresh, 2000. "A comparative study of structural models of corporate bond yields: An exploratory investigation," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 255-269, January.
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Cited by:
  1. Stephen Morris & Hyun Song Shin, 2004. "Liquidity Black Holes," Review of Finance, Springer, vol. 8(1), pages 1-18.
  2. Hyun Shin, 2001. "Coordination Risk and the Price of Debt," Economics Series Working Papers 1999-W25, University of Oxford, Department of Economics.

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