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Empirical Evaluation of Hybrid Defaultable Bond Pricing Models


  • S. Antes
  • M. Ilg
  • B. Schmid
  • R. Zagst


A four-factor model (the extended model of Schmid and Zagst) is presented for pricing credit risk related instruments such as defaultable bonds or credit derivatives. It is an advancement of an earlier three-factor model. In addition to a firm-specific credit risk factor, a new systematic risk factor in the form of GDP growth rate is included. This new model is set in the context of other hybrid defaultable bond pricing models and empirically compared to specific representatives. We find that a model based only on firm-specific variables is unable to capture changes in credit spreads completely. However, it is shown that in this model, market variables such as GDP growth rates, non-defaultable interest rates and firm-specific variables together significantly influence credit spread levels and changes.

Suggested Citation

  • S. Antes & M. Ilg & B. Schmid & R. Zagst, 2008. "Empirical Evaluation of Hybrid Defaultable Bond Pricing Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(3), pages 219-249.
  • Handle: RePEc:taf:apmtfi:v:15:y:2008:i:3:p:219-249 DOI: 10.1080/13504860701718430

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    References listed on IDEAS

    1. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. repec:dau:papers:123456789/2191 is not listed on IDEAS
    4. Leland, Hayne E & Toft, Klaus Bjerre, 1996. " Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Journal of Finance, American Finance Association, vol. 51(3), pages 987-1019, July.
    5. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    6. Giesecke, Kay, 2006. "Default and information," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2281-2303, November.
    7. K. Borovkov & Alexander Novikov, 2004. "Explicit Bounds for Approximation Rates for Boundary Crossing Probabilities for the Wiener Process," Research Paper Series 115, Quantitative Finance Research Centre, University of Technology, Sydney.
    8. Zhou, Chunsheng, 2001. "The term structure of credit spreads with jump risk," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 2015-2040, November.
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