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The Estimation of Default Risk with Market Data

Author

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  • Hubner, G.

Abstract

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.

Suggested Citation

  • Hubner, G., 1998. "The Estimation of Default Risk with Market Data," Liege - Groupe d'Etude des Mathematiques du Management et de l'Economie 9813, UNIVERSITE DE LIEGE, Faculte d'economie, de gestion et de sciences sociales, Groupe d'Etude des Mathematiques du Management et de l'Economie.
    • Handle: RePEc:fth:gemame:9813
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    More about this item

    Keywords

    RISK ; CREDIT ; ESTIMATOR;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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