IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Estimating the Structural Credit Risk Model When Equity Prices Are Contaminated by Trading Noises

  • Jin-Chuan Duan

    ()

    (School of Management, University of Toronto)

  • Andras Fulop

    ()

    (School of Management, University of Toronto)

Registered author(s):

    The transformed-data maximum likelihood estimation (MLE) method for struc- tural credit risk models developed by Duan (1994) is extended to account for the fact that observed equity prices may have been contaminated by trading noises. With the presence of trading noises, the likelihood function based on the observed equity prices can only be evaluated via some nonlinear filtering scheme. We devise a particle filtering algorithm that is practical for conducting the MLE estimation of the structural credit risk model of Merton (1974). We implement the method on the Dow Jones 30 firms and on 100 randomly selected firms, and find that ignoring trading noises can lead to significantly over-estimating the firm's asset volatility. A simulation study is then conducted to ascertain the performance of the estimation method.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://econ.core.hu/doc/dp/dp/mtdp0517.pdf
    Download Restriction: no

    Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 0517.

    as
    in new window

    Length: 30 pages
    Date of creation: 2005
    Date of revision:
    Handle: RePEc:has:discpr:0517
    Contact details of provider: Postal: 1112 Budapest, Budaorsi ut 45.
    Phone: (+36-1) 309-2652
    Fax: (36-1) 319-3136
    Web page: http://econ.core.hu

    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Hasbrouck, Joel, 1993. "Assessing the Quality of a Security Market: A New Approach to Transaction-Cost Measurement," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 191-212.
    2. Duan, Jin-Chuan & Simonato, Jean-Guy, 2002. "Maximum likelihood estimation of deposit insurance value with interest rate risk," Journal of Empirical Finance, Elsevier, vol. 9(1), pages 109-132, January.
    3. Yacine Ait-Sahalia & Per A. Mykland, 2003. "How Often to Sample a Continuous-Time Process in the Presence of Market Microstructure Noise," NBER Working Papers 9611, National Bureau of Economic Research, Inc.
    4. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
    5. Ananth Madhavan & Matthew Richardson & Mark Roomans, . "Why Do Security Prices Change? A Transaction-Level Analysis of NYSE Stocks," Rodney L. White Center for Financial Research Working Papers 20-94, Wharton School Rodney L. White Center for Financial Research.
    6. Duan, Jin-Chuan & Yu, Min-Teh, 1994. "Assessing the cost of Taiwan's deposit insurance," Pacific-Basin Finance Journal, Elsevier, vol. 2(1), pages 73-90, March.
    7. 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 449-70, May.
    8. Jarrow, Robert A. & Turnbull, Stuart M., 2000. "The intersection of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 271-299, January.
    9. Luc Laeven, 2002. "Bank Risk and Deposit Insurance," World Bank Economic Review, World Bank Group, vol. 16(1), pages 109-137, June.
    10. Ericsson, Jan & Reneby, Joel, 2003. "Valuing Corporate Liabilities," SIFR Research Report Series 15, Institute for Financial Research.
    11. Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167.
    12. Harris, Lawrence, 1990. "Estimation of Stock Price Variances and Serial Covariances from Discrete Observations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 291-306, September.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:has:discpr:0517. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Adrienn Foldi)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.