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A down-and-out exchange option model with jumps to evaluate firms' default probabilities in Brazil

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  • Barbedo, Claudio Henrique da Silveira
  • Lemgruber, Eduardo Facó

Abstract

We develop a tractable structural model to estimate a firm's default probability by modeling its asset and debt behavior. The model incorporates jump factors. For a set of Brazilian large corporations, we compare the structural model results to the default probabilities predicted by a survival analysis applied to the Central Bank debt information database. Our model outperforms other structural models. In a last step, we use a firm's sector failure probabilities to calibrate the model. This process is executed by adjusting the model jump volatility and it helps to explain the differences between debt and equity market failure probabilities.

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  • Barbedo, Claudio Henrique da Silveira & Lemgruber, Eduardo Facó, 2009. "A down-and-out exchange option model with jumps to evaluate firms' default probabilities in Brazil," Emerging Markets Review, Elsevier, vol. 10(3), pages 179-190, September.
    • Handle: RePEc:eee:ememar:v:10:y:2009:i:3:p:179-190
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    3. Mili, Medhi & Sahut, Jean-Michel & Teulon, Frédéric, 2018. "Modeling recovery rates of corporate defaulted bonds in developed and developing countries," Emerging Markets Review, Elsevier, vol. 36(C), pages 28-44.

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