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On valuing corporate debt with the volatility of corporate assets evolving according to an Ornstein-Uhlenbeck process

Author

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  • Bakhodir Ergashev

    (Washington University in St. Louis)

Abstract

In this paper the problem of valuing corporate debt with possibility of default is considered. It is assumed that the volatility of the value of a firm's assets evolves according to an Ornstein-Uhlenbeck process and default occurs only if the value of corporate assets falls below an exogenously specified, time dependent barrier. In the case of a particular choice of default barrier the explicit formulas for the present value of a corporate debt, the total value of the firm, the value of equity, the expected default time and the variation of default time are derived.

Suggested Citation

  • Bakhodir Ergashev, 2002. "On valuing corporate debt with the volatility of corporate assets evolving according to an Ornstein-Uhlenbeck process," Finance 0206002, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:0206002 Note: Type of Document - Tex/WordPerfect/Handwritten; prepared on La Tex; to print on HP/PostScript/Franciscan monk; pages: 11 ; figures: non. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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    File URL: http://econwpa.repec.org/eps/fin/papers/0206/0206002.pdf
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    References listed on IDEAS

    as
    1. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 377-389, September.
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    More about this item

    Keywords

    Coporate debt; Ornstein-Uhlenbeck process; default time;

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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