Valuation models for default-risky securities: An overview
Valuing financial securities often assumes that the contractual obligations of the security are going to be honored. However, frequently a party to a contract will default on its obligations. Because the contractual features of defaultable securities are usually complex and it is difficult to find comparable securities for which to observe prices, valuation requires formal models that take into account the security's complexities and the uncertainties surrounding future cash flows. Many financial institutions hold large amounts of these securities in their portfolios, and it is important that these institutions have a reliable estimate of the resulting credit exposure. Understanding the strengths and drawbacks of various modeling approaches is also important for implementing prudent risk-management policies to manage credit exposures. ; The author of this article reviews developments in valuation models for defaultable securities dating back to Merton (1974), concluding that although researchers have improved considerably on the basic Merton framework, problems remain. For example, many of the institutional features of bankruptcy and defaults, such as rescheduling of debts, cannot be readily incorporated in the models discussed without making the models intractable. He points out the need for the next generation of valuation models to incorporate at least some institutional features and be able to use the historical probabilities of defaults and credit rating changes without making unnecessarily strong assumptions.
Volume (Year): (1998)
Issue (Month): Q 4 ()
|Contact details of provider:|| Postal: 1000 Peachtree St., N.E., Atlanta, Georgia 30309|
Web page: http://www.frbatlanta.org/
More information through EDIRC
|Order Information:|| Email: |
When requesting a correction, please mention this item's handle: RePEc:fip:fedaer:y:1998:i:q4:p:22-35:n:v.83no.4. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.