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Valuing Corporate Liabilities

  • Ericsson, Jan

    ()

    (McGill University)

  • Reneby, Joel

    ()

    (Stockholm School of Economics)

We implement a structural bond pricing framework on a large panel of US industrial issues using an efficient maximum likelihood methodology. Although, like others before us, we underpredict yield spread levels when using only stock market data in the estimation, our errors are much less dispersed. In addition, we show that when our model underpredicts spreads, the errors are correlated with liquidity proxies, suggesting that an underestimation of total yield spreads may be economically plausible. When we include bond price information in our estimation, our errors become similar in magnitude to those found in recent implementations of reduced form models.

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Paper provided by Institute for Financial Research in its series SIFR Research Report Series with number 15.

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Length: 66 pages
Date of creation: 15 Jun 2003
Date of revision:
Handle: RePEc:hhs:sifrwp:0015
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  1. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. 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 637-54, May-June.
  3. Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167.
  4. Pierre Mella-Barral & William R M Perraudin, 1993. "Strategic Debt Service," CEPR Financial Markets Paper 0039, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
  5. E. Philip Jones & Scott P. Mason & Eric Rosenfeld, 1983. "Contingent Claims Valuation of Corporate Liabilities: Theory and Empirical Tests," NBER Working Papers 1143, National Bureau of Economic Research, Inc.
  6. Fisher, Lawrence, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 625-27, July.
  7. Gregory R. Duffee, 1996. "Estimating the price of default risk," Finance and Economics Discussion Series 96-29, Board of Governors of the Federal Reserve System (U.S.).
  8. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
  9. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," Harvard Institute of Economic Research Working Papers 1945, Harvard - Institute of Economic Research.
  10. Jun Liu & Francis A. Longstaff & Ravit E. Mandell, 2002. "The Market Price of Credit Risk: An Empirical Analysis of Interest Rate Swap Spreads," NBER Working Papers 8990, National Bureau of Economic Research, Inc.
  11. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  12. Delianedis, Gordon & Geske, Robert, 2001. "The Components of Corporate Credit Spreads: Default, Recovery, Tax, Jumps, Liquidity, and Market Factors," University of California at Los Angeles, Anderson Graduate School of Management qt32x284q3, Anderson Graduate School of Management, UCLA.
  13. Jan Ericsson & Olivier Renault, 2006. "Liquidity and Credit Risk," Journal of Finance, American Finance Association, vol. 61(5), pages 2219-2250, October.
  14. Mella-Barral, Pierre, 1999. "The Dynamics of Default and Debt Reorganization," Review of Financial Studies, Society for Financial Studies, vol. 12(3), pages 535-78.
  15. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
  16. Gregory R. Duffee, 1998. "The Relation Between Treasury Yields and Corporate Bond Yield Spreads," Journal of Finance, American Finance Association, vol. 53(6), pages 2225-2241, December.
  17. Pierre Collin-Dufresne, 2001. "The Determinants of Credit Spread Changes," Journal of Finance, American Finance Association, vol. 56(6), pages 2177-2207, December.
  18. Saa-Requejo, Jesus & Santa-Clara, Pedro, 1997. "Bond Pricing with Default Risk," University of California at Los Angeles, Anderson Graduate School of Management qt3w71g2ch, Anderson Graduate School of Management, UCLA.
  19. Hayne E. Leland, 1998. "Agency Costs, Risk Management, and Capital Structure," Journal of Finance, American Finance Association, vol. 53(4), pages 1213-1243, 08.
  20. Jan Ericsson, 2005. "Estimating Structural Bond Pricing Models," The Journal of Business, University of Chicago Press, vol. 78(2), pages 707-735, March.
  21. Ericsson, Jan & Reneby, Joel, 1999. "A Note on Contingent Claims Pricing with Non-Traded Assets," SSE/EFI Working Paper Series in Economics and Finance 314, Stockholm School of Economics, revised 01 Feb 2002.
  22. Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
  23. E. Philip Jones & Scott P. Mason & Eric Rosenfeld, 1985. "Contingent Claims Valuation of Corporate Liabilities: Theory and Empirical Tests," NBER Chapters, in: Corporate Capital Structures in the United States, pages 239-264 National Bureau of Economic Research, Inc.
  24. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-67, May.
  25. Charles S. Morris & Robert Neal & Douglas Rolph, 1998. "Credit spreads and interest rates : a cointegration approach," Research Working Paper 98-08, Federal Reserve Bank of Kansas City.
  26. Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
  27. 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.
  28. Jones, E Philip & Mason, Scott P & Rosenfeld, Eric, 1984. " Contingent Claims Analysis of Corporate Capital Structures: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 39(3), pages 611-25, July.
  29. In Joon Kim & Krishna Ramaswamy & Suresh Sundaresan, 1993. "Does Default Risk in Coupons Affect the Valuation of Corporate Bonds?: A Contingent Claims Model," Financial Management, Financial Management Association, vol. 22(3), Fall.
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