A Structural Model of the Term Structure of Credit Spreads with Stochastic Recovery and Contractual Design
This paper presents an alternative modelling of the term structure of the credit spreads under a structural approach. We rely upon the barrier option pricing frameworkto price a corporate zero-coupon bond with a stochastic present value of the recovery consistent with the evidence on the business cycle effects. Stochastic interest rates are therefore introduced through a two-factor model of the term structure of interest rates that impacts the assets value of the firm. Comparative statics with similar models such as Briys and de Varenne  are provided thereafter. The pricing model is then shown to be related to the corporate context of an external funding requirement of an investment project leading to endogenous values of the dividend payout rate and the default threshold value. Finally, the asset volatility, which accounts for much of the credit risk in this class of models, is related to the stock market volatility through a backward use of the model therefore adding to its tractability whiletaking advantage of the liquidity and information dissemination in stock markets.
|Date of creation:||1999|
|Publication status:||Published by:|
|Contact details of provider:|| Postal: CP114/03, 42 avenue F.D. Roosevelt, 1050 Bruxelles|
Phone: +32 (0)2 650.48.64
Fax: +32 (0)2 650.41.88
Web page: http://difusion.ulb.ac.be
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:99-002. 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: (Benoit Pauwels)
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.