Contingent Claims Valuation of Corporate Liabilities: Theory and Empirical Tests
Although the Contingent Claims Analysis model has become the premier theory of how value is allocated among claimants on firms,its empirical validity remains an open question. In addition to being of academic interest, a test of the model would have significant practical implications. If it can be established that the model predicts actual market prices, then the model can be used to price new and untraded claims, to infer firm values from prices of traded claims like equity and to price covenants separately. In this paper evidence is presented on how well a model which makes the usual assumptions in the literature does in predicting market prices for claims in standard capital structures. The results suggest that the usual assumption list requires modification before it can serve as a basis for valuing corporate claims.
|Date of creation:||Jun 1983|
|Date of revision:|
|Publication status:||published as Jones, Philip E., Scott P. Mason and Eric Rosenfeld. "Contingent Claims Valuation of Corporate Liabilities: Theory and Empirical Tests." Corporate Capital Structures in the United States, edited by Benjamin M. Friedman. Chicago: University of Chicago Press, (1985), pp. 239-261.|
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- Robert C. Merton, 1973. "Theory of Rational Option Pricing," Bell Journal of Economics, The RAND Corporation, vol. 4(1), pages 141-183, Spring.
- Parkinson, Michael, 1977. "Option Pricing: The American Put," The Journal of Business, University of Chicago Press, vol. 50(1), pages 21-36, January.
- Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
- 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.
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