Structural Credit Risk Model with Stochastic Volatility: A Particle-filter Approach
This paper extends Merton's structural credit risk model to account for the fact that the firm's asset volatility follows a stochastic process. With the presence of stochastic volatility, the transformed-data maximum likelihood estimation (MLE) method of Duan (1994, 2000) can no longer be applied to estimate the model. We devise a particle filtering algorithm to solve this problem. This algorithm is based on the general non-linear and non-Gaussian filtering with sequential parameter learning, and a simulation study is conducted to ascertain its finite sample performance. Meanwhile, we implement this model on the real data of companies in Dow Jones industrial average and find that incorporating stochastic volatility into the structural model can largely improve the model performance.
|Date of creation:||28 Oct 2013|
|Date of revision:|
|Contact details of provider:|| Phone: 07 3138 5066|
Fax: 07 3138 1500
Web page: http://www.ncer.edu.au
More information through EDIRC
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.:
- Charles Quanwei Cao & Gurdip S. Bakshi & Zhiwu Chen, 1999.
"Do Call Prices and the Underlying Stock Always Move in the Same Direction?,"
Yale School of Management Working Papers
ysm125, Yale School of Management.
- Bakshi, Gurdip & Cao, Charles & Chen, Zhiwu, 2000. "Do Call Prices and the Underlying Stock Always Move in the Same Direction?," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 549-84.
- Jin-Chuan Duan, 2000. "Correction: Maximum Likelihood Estimation Using Price Data of the Derivative Contract (Mathematical Finance 1994, 4/2, 155-167)," Mathematical Finance, Wiley Blackwell, vol. 10(4), pages 461-462.
- Shirley J. Huang & Jun Yu, .
"Bayesian Analysis of Structural Credit Risk Models with Microstructure Noises,"
CoFie-07-2008, Sim Kee Boon Institute for Financial Economics.
- Huang, Shirley J. & Yu, Jun, 2010. "Bayesian analysis of structural credit risk models with microstructure noises," Journal of Economic Dynamics and Control, Elsevier, vol. 34(11), pages 2259-2272, November.
- Shirley J. Huang & Jun Yu, 2009. "Bayesian Analysis of Structural Credit Risk Models with Microstructure Noises," Finance Working Papers 23054, East Asian Bureau of Economic Research.
- Stein, Jeremy, 1989. " Overreactions in the Options Market," Journal of Finance, American Finance Association, vol. 44(4), pages 1011-23, September.
- 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.
- Merton, Robert C., 1973.
"On the pricing of corporate debt: the risk structure of interest rates,"
684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- Duan, Jin-Chuan & Fulop, Andras, 2009. "Estimating the structural credit risk model when equity prices are contaminated by trading noises," Journal of Econometrics, Elsevier, vol. 150(2), pages 288-296, June.
- Jin-Chuan Duan, 1994. "Maximum Likelihood Estimation Using Price Data Of The Derivative Contract," Mathematical Finance, Wiley Blackwell, vol. 4(2), pages 155-167.
- Bjørn Eraker & Michael Johannes & Nicholas Polson, 2003. "The Impact of Jumps in Volatility and Returns," Journal of Finance, American Finance Association, vol. 58(3), pages 1269-1300, 06.
When requesting a correction, please mention this item's handle: RePEc:qut:auncer:2013_91. 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: (School of Economics and Finance)The email address of this maintainer does not seem to be valid anymore. Please ask School of Economics and Finance to update the entry or send us the correct address
If references are entirely missing, you can add them using this form.