This paper presents a Gaussian reduced-form default risk model. The riskless rate follows a two-dimensional ARMA process. The mean-reverting default spread features a ratio involving the market value of the firm's assets. Under recurrent credit risk, bond prices are analytically derived. Using panels of Eurobond prices, the S&P and Moody's ratings look quite equivalent, and the fit improves as ratings fall. Although the market-to-book ratio looks like a good candidate state variable for the rest of the world except Japan, it does not bring additional information for the pricing of US corporate bonds.
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Length: 27 pages Date of creation: 1998 Date of revision: Handle: RePEc:fth:gemame:9813
Contact details of provider: Postal: UNIVERSITE DE LIEGE, Faculte d'economie, de gestion et de sciences sociales, Groupe d'Etude des Mathematiques du Management et de l'Economie. 4000 Liege, BELGIQUE Web page: http://www.sig.egss.ulg.ac.be/gemme/ More information through EDIRC
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