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An Extended Structural Credit Risk Model (forthcoming in the Icfai Journal of Financial Risk Management; all copyrights rest with the Icfai University Press)

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Author Info
Marco Realdon
Abstract

This paper presents an extended structural credit risk model that pro- vides closed form solutions for fixed and floating coupon bonds and credit default swaps. This structural model is an "extended" one in the following sense. It allows for the default free term structure to be driven by the a multi-factor Gaussian model, rather than by a single factor one. Expected default occurs as a latent diffusion process first hits the default barrier, but the diffusion process is not the value of the firm's assets. Default can be "expected" or "unexpected". Liquidity risk is correlated with credit risk. It is not necessary to disentangle the risk of unexpected default from liquidity risk. A tractable and accurate recovery assumption is proposed.

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Paper provided by Department of Economics, University of York in its series Discussion Papers with number 07/26.

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Date of creation: Sep 2007
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Handle: RePEc:yor:yorken:07/26

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Related research
Keywords: structural credit risk model; Vasicek model; Gaussian term structure model; bond pricing; credit default swap pricing; unexpected default; liquidity risk.;

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

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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.:
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    Other versions:
  2. Leland, Hayne E, 1994. " Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-52, September. [Downloadable!] (restricted)
    Other versions:
  3. Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02. [Downloadable!] (restricted)
  4. Joost Driessen, 2005. "Is Default Event Risk Priced in Corporate Bonds?," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(1), pages 165-195. [Downloadable!] (restricted)
  5. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
  6. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(4), pages 573-92. [Downloadable!] (restricted)
  7. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October. [Downloadable!] (restricted)
  8. Jan Ericsson, Joel Reneby, 1998. "A framework for valuing corporate securities," Applied Mathematical Finance, Taylor and Francis Journals, vol. 5(3-4), pages 143-163, September. [Downloadable!] (restricted)
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  9. Francois, Pascal & Hubner, Georges, 2004. "Credit derivatives with multiple debt issues," Journal of Banking & Finance, Elsevier, vol. 28(5), pages 997-1021, May. [Downloadable!] (restricted)
  10. Dai, Qiang & Singleton, Kenneth J., 2002. "Expectation puzzles, time-varying risk premia, and affine models of the term structure," Journal of Financial Economics, Elsevier, vol. 63(3), pages 415-441, March. [Downloadable!] (restricted)
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