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A Structural Model with Unobserved Default Boundary

  • Thorsten Schmidt
  • Alexander Novikov
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    A firm-value model similar to the one proposed by Black and Cox (1976) is considered. Instead of assuming a constant and known default boundary, the default boundary is an unobserved stochastic process. This process has a Brownian component, reflecting the influence of uncertain effects on the precise timing of the default, and a jump component, which relates to abrupt changes in the policy of the company, exogenous events or changes in the debt structure. Interestingly, this setup admits a default intensity, so the reduced form methodology can be applied.

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    Article provided by Taylor & Francis Journals in its journal Applied Mathematical Finance.

    Volume (Year): 15 (2008)
    Issue (Month): 2 ()
    Pages: 183-203

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    Handle: RePEc:taf:apmtfi:v:15:y:2008:i:2:p:183-203
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