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The Valuation of Corporate Liabilities: Theory and Tests

Author

Listed:
  • Reneby, Joel

    (Dept. of Finance, Stockholm School of Economics)

  • Ericsson, Jan

    (Faculty of Management, McGill University)

Abstract

We develop a structural bond pricing approach and implement it on a large panel of US industrial bonds using an efficient maximum likelihood methodology. We evaluate the model's ability to predict yield spread levels and changes out-of-sample. Errors are smaller and distinctly less variable than those found in previous implementations of structural as well as reduced form models. Furthermore, our analysis provide evidence that bond yield spreads incorporate a substantial liquidity component on top of the default spread structural models are designed to capture.

Suggested Citation

  • Reneby, Joel & Ericsson, Jan, 2001. "The Valuation of Corporate Liabilities: Theory and Tests," SSE/EFI Working Paper Series in Economics and Finance 445, Stockholm School of Economics, revised 07 Jan 2003.
    • Handle: RePEc:hhs:hastef:0445
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

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    3. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.
    4. Abel Elizalde, 2006. "Credit Risk Models III: Reconciliation Reduced – Structural Models," Working Papers wp2006_0607, CEMFI.
    5. Thorsell, Håkan, 2009. "Returns to Defaulted Corporate Bonds," SSE/EFI Working Paper Series in Business Administration 2009:7, Stockholm School of Economics.
    6. Hanke, Michael, 2005. "Pricing options on leveraged equity with default risk and exponentially increasing, finite maturity debt," Journal of Economic Dynamics and Control, Elsevier, vol. 29(3), pages 389-421, March.
    7. Marco Realdon, "undated". "Valuation of Put Options on Leveraged Equity," Discussion Papers 03/19, Department of Economics, University of York.
    8. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Systemically important banks: an analysis for the European banking system," International Economics and Economic Policy, Springer, vol. 3(1), pages 73-89, April.
    9. Robert Elliott & Jia Shen, 2015. "Dynamic optimal capital structure with regime switching," Annals of Finance, Springer, vol. 11(2), pages 199-220, May.
    10. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    11. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.

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    More about this item

    Keywords

    corporate bonds; credit risk; yield spreads; default; structural bond pricing models;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    NEP fields

    This paper has been announced in the following NEP Reports:

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