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The Valuation of Corporate Liabilities: Theory and Tests

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Author Info

  • Reneby, Joel

    ()
    (Dept. of Finance, Stockholm School of Economics)

  • Ericsson, Jan

    ()
    (Faculty of Management, McGill University)

Abstract

We develop a structural bond pricing approach and implement it on a large panel of US industrial bonds using an efficient maximum likelihood methodology. We evaluate the model's ability to predict yield spread levels and changes out-of-sample. Errors are smaller and distinctly less variable than those found in previous implementations of structural as well as reduced form models. Furthermore, our analysis provide evidence that bond yield spreads incorporate a substantial liquidity component on top of the default spread structural models are designed to capture.

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File URL: http://swopec.hhs.se/hastef/papers/hastef0445.pdf
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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 445.

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Length: 61 pages
Date of creation: 01 Feb 2001
Date of revision: 19 Dec 2002
Handle: RePEc:hhs:hastef:0445

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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Web page: http://www.hhs.se/
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Related research

Keywords: corporate bonds; credit risk; yield spreads; default; structural bond pricing models;

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References

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  1. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, 08.
  2. Jan Ericsson & Olivier Renault, 2006. "Liquidity and Credit Risk," Journal of Finance, American Finance Association, vol. 61(5), pages 2219-2250, October.
  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. E. Philip Jones & Scott P. Mason & Eric Rosenfeld, 1985. "Contingent Claims Valuation of Corporate Liabilities: Theory and Empirical Tests," NBER Chapters, in: Corporate Capital Structures in the United States, pages 239-264 National Bureau of Economic Research, Inc.
  5. 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.
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  7. Jan Ericsson & Joel Reneby, 1998. "A framework for valuing corporate securities," Applied Mathematical Finance, Taylor & Francis Journals, vol. 5(3-4), pages 143-163.
  8. 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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  12. Ericsson, Jan & Reneby, Joel, 1999. "A Note on Contingent Claims Pricing with Non-Traded Assets," Working Paper Series in Economics and Finance 314, Stockholm School of Economics, revised 01 Feb 2002.
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Citations

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Cited by:
  1. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Systemically important banks: an analysis for the European banking system," International Economics and Economic Policy, Springer, vol. 3(1), pages 73-89, April.
  2. Abel Elizalde, 2006. "Credit Risk Models Iii: Reconciliation Reduced - Structural Models," Working Papers wp2006_0607, CEMFI.
  3. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
  4. Joao C. A. Teixeira, 2005. "An empirical analysis of structural models of corporate debt pricing," Finance 0505001, EconWPA.
  5. Marco Realdon, . "Valuation of Put Options on Leveraged Equity," Discussion Papers 03/19, Department of Economics, University of York.
  6. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
  7. Thorsell, HÃ¥kan, 2009. "Returns to Defaulted Corporate Bonds," Working Paper Series in Business Administration 2009:7, Stockholm School of Economics.
  8. Max Bruche, 2006. "Estimating Structural Models Of Corporate Bond Prices," Working Papers wp2006_0610, CEMFI.
  9. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
  10. Hanke, Michael, 2005. "Pricing options on leveraged equity with default risk and exponentially increasing, finite maturity debt," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 389-421, March.

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