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A Model for Pricing Stocks and Bonds with Default Risk

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  • Harry Mamaysky

Abstract

This paper develops a tractable, dynamic, no-arbitrage model for the pricing of bonds and stocks that are subject to default risk. The model produces the bond pricing equations of the Duffie and Singleton (1999) framework. It is then shown that a particular choice of dividend process, characterized by affine dividend yields, along with the Duffie and Singleton (1999) default specification, produces stock prices that are exponential affine in the model's state variables. Importantly, the model allows for quite general interdependence between the prices of risky debt and equity.

Suggested Citation

  • Harry Mamaysky, 2002. "A Model for Pricing Stocks and Bonds with Default Risk," Yale School of Management Working Papers ysm286, Yale School of Management.
    • Handle: RePEc:ysm:somwrk:ysm286
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    File URL: http://icfpub.som.yale.edu/publications/2661
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    Cited by:

    1. Bruche, Max, 2005. "Estimating structural bond pricing models via simulated maximum likelihood," LSE Research Online Documents on Economics 24647, London School of Economics and Political Science, LSE Library.
    2. Sanjiv R. Das & Rangarajan K. Sundaram, 2007. "An Integrated Model for Hybrid Securities," Management Science, INFORMS, vol. 53(9), pages 1439-1451, September.
    3. Longstaff, Francis & Piazzesi, Monika, 2002. "Corporate Earnings and the Equity Premium," University of California at Los Angeles, Anderson Graduate School of Management qt3qn115m4, Anderson Graduate School of Management, UCLA.

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