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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)

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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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Publisher 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
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Related research
Keywords: corporate bonds credit risk yield spreads default structural bond pricing models

Other versions of this item:

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Sarig, Oded & Warga, Arthur, 1989. " Some Empirical Estimates of the Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 44(5), pages 1351-60, December. [Downloadable!] (restricted)
  2. Mella-Barral, Pierre, 1999. "The Dynamics of Default and Debt Reorganization," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(3), pages 535-78.
  3. Lee Crabbe, 1991. "Callable corporate bonds: a vanishing breed," Finance and Economics Discussion Series 155, Board of Governors of the Federal Reserve System (U.S.).
  4. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March. [Downloadable!] (restricted)
  5. Olivier Renault & Jan Ericsson, 2000. "Liquidity and Credit Risk," FMG Discussion Papers dp362, Financial Markets Group. [Downloadable!] (restricted)
    Other versions:
  6. Fisher, Lawrence, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 625-27, July. [Downloadable!] (restricted)
  7. Anderson, Ronald W & Sundaresan, Suresh, 1996. "Design and Valuation of Debt Contracts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 37-68. [Downloadable!] (restricted)
  8. E. Philip Jones & Scott P. Mason & Eric Rosenfeld, 1985. "Contingent Claims Valuation of Corporate Liabilities: Theory and Empirical Tests," NBER Working Papers 1143, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July. [Downloadable!] (restricted)
    Other versions:
  10. Jesus Saa-Requejo & Pedro Santa-Clara, 1997. "Bond Pricing with Default Risk," University of California at Los Angeles, Anderson Graduate School of Management 1127, Anderson Graduate School of Management, UCLA. [Downloadable!]
  11. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
    Other versions:
  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. [Downloadable!]
  13. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 12(4), pages 687-720.
  14. Alderson, Michael J. & Betker, Brian L., 1995. "Liquidation costs and capital structure," Journal of Financial Economics, Elsevier, vol. 39(1), pages 45-69, September. [Downloadable!] (restricted)
  15. 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. [Downloadable!] (restricted)
  16. 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. [Downloadable!] (restricted)
  17. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June. [Downloadable!] (restricted)
  18. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 10(2), pages 481-523.
  19. Ericsson, Jan & Reneby, Joel, 1995. "A Framework for Valuing Corporate Securities," Working Paper Series in Economics and Finance 89, Stockholm School of Economics, revised Oct 1998. [Downloadable!]
    Other versions:
  20. Mella-Barral, Pierre & Perraudin, William, 1997. " Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-56, June. [Downloadable!] (restricted)
  21. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, 08. [Downloadable!] (restricted)
    Other versions:
  22. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Max Bruche, 2006. "Estimating Structural Models Of Corporate Bond Prices," Working Papers wp2006_0610, CEMFI. [Downloadable!]
  2. Marco Realdon, . "Valuation of Put Options on Leveraged Equity," Discussion Papers 03/19, Department of Economics, University of York. [Downloadable!]
  3. Joao C. A. Teixeira, 2005. "An empirical analysis of structural models of corporate debt pricing," Finance 0505001, EconWPA. [Downloadable!]
    Other versions:
  4. Abel Elizalde, 2006. "Credit Risk Models Iii: Reconciliation Reduced - Structural Models," Working Papers wp2006_0607, CEMFI. [Downloadable!]
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