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The Impact of Persistence in Volatility over the Probability of Default

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  • Rodrigo Alfaro
  • Natán Golberger

Abstract

We evaluate the impact of persistence in volatility over the probability of default in Merton’s credit risk model. Our main conclusion is that a high degree of persistence, as it is observed in equity returns, implies a lower probability of default for those cases where firms possess a high level of leverage.

Suggested Citation

  • Rodrigo Alfaro & Natán Golberger, 2013. "The Impact of Persistence in Volatility over the Probability of Default," Working Papers Central Bank of Chile 689, Central Bank of Chile.
  • Handle: RePEc:chb:bcchwp:689
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    File URL: http://si2.bcentral.cl/public/pdf/documentos-trabajo/pdf/dtbc689.pdf
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    1. Ke Wang & Darrell Duffie, 2004. "Multi-Period Corporate Failure Prediction With Stochastic Covariates," Econometric Society 2004 Far Eastern Meetings 747, Econometric Society.
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