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A latent process model for the pricing of corporate securities

Listed author(s):
  • Masaaki Kijima

    ()

  • Teruyoshi Suzuki

    ()

  • Keiichi Tanaka

    ()

Registered author(s):

    We propose a structural model with a joint process of tangible assets (marker) and firm status for the pricing of corporate securities. The firm status is assumed to be latent or unobservable, and default occurs when the firm status process reaches a default threshold at the first time. The marker process is observable and assumed to be correlated with the latent firm status. The recovery upon default is a fraction of tangible assets at the time of default. Our model can evaluate both the corporate debt and equity to fit their market prices in a unified framework. When the two processes are perfectly correlated, our model is reduced to the seminal Black–Cox model. Numerical examples are given to support the usefulness of our model. Copyright Springer-Verlag 2009

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    File URL: http://hdl.handle.net/10.1007/s00186-008-0246-5
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    Article provided by Springer & Gesellschaft für Operations Research (GOR) & Nederlands Genootschap voor Besliskunde (NGB) in its journal Mathematical Methods of Operations Research.

    Volume (Year): 69 (2009)
    Issue (Month): 3 (July)
    Pages: 439-455

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    Handle: RePEc:spr:mathme:v:69:y:2009:i:3:p:439-455
    DOI: 10.1007/s00186-008-0246-5
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    Web page: https://gor.uni-paderborn.de/index.php?id=7

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    1. Briys, Eric & de Varenne, François, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(02), pages 239-248, June.
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    11. Masaaki Kijima, 1998. "Monotonicities in a Markov Chain Model for Valuing Corporate Bonds Subject to Credit Risk," Mathematical Finance, Wiley Blackwell, vol. 8(3), pages 229-247.
    12. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
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