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Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing

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  • Franck Moraux

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

Most structural models of default risk assume that the firm's asset return is normally distributed, with a constant volatility. By contrast, this article details the properties that the process of assets should have in the case of financially weakened firms. It points out that jump-diffusion processes with time-varying volatility provide a refined and accurate perspective on the business risk dimension of default risk. Representative Arrow–Debreu state price densities (SPD) and term structures of credit spreads are then explored. The credit curves show that the business uncertainties play a major in the pricing of corporate liabilities.

Suggested Citation

  • Franck Moraux, 2004. "Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing," Post-Print halshs-00010138, HAL.
    • Handle: RePEc:hal:journl:halshs-00010138
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    Cited by:

    1. Choi, Jae Yong & Yi, Junesuh, 2026. "Asymmetry in the counter-cyclicality of corporate credit spreads, across the business cycle," Research in International Business and Finance, Elsevier, vol. 81(C).

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