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Valuing defaultable bonds: an excursion time approach

Author

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  • Martina Nardon

    (Università Ca' Foscari di Venezia, Dipartimento di Matematica Applicata)

Abstract

Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical threshold. In the excursion approach the duration of default, the time period from the financial distress announcement through its resolution, is explicitly modeled. In this contribution, we provide a review of the literature on excursion time models of credit risk. Moreover, we examine the effects on credit spreads structure of different specifications of the event that triggers default.

Suggested Citation

  • Martina Nardon, 2005. "Valuing defaultable bonds: an excursion time approach," Finance 0511015, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpfi:0511015
    Note: Type of Document - pdf; pages: 16
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0511/0511015.pdf
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    References listed on IDEAS

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    1. Galai, Dan & Raviv, Alon & Wiener, Zvi, 2007. "Liquidation triggers and the valuation of equity and debt," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3604-3620, December.
    2. Martina Nardon, 2008. "First Passage and Excursion Time Models for Valuing Defautltable Bonds: a Review with Some Insights," Frontiers in Finance and Economics, SKEMA Business School, vol. 5(2), pages 1-25, October.
    3. 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 449-470, May.
    4. 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.
    5. Mark Broadie & Mikhail Chernov & Suresh Sundaresan, 2007. "Optimal Debt and Equity Values in the Presence of Chapter 7 and Chapter 11," Journal of Finance, American Finance Association, vol. 62(3), pages 1341-1377, June.
    6. Allan C. Eberhart & Edward I. Altman & Reena Aggarwal, 1999. "The Equity Performance of Firms Emerging from Bankruptcy," Journal of Finance, American Finance Association, vol. 54(5), pages 1855-1868, October.
    7. 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.
    8. 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 637-654, May-June.
    9. Jean Helwege, 1999. "How Long Do Junk Bonds Spend in Default?," Journal of Finance, American Finance Association, vol. 54(1), pages 341-357, February.
    10. 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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    Cited by:

    1. Sukhomlin, Nikolay & Santana Jiménez, Lisette Josefina, 2010. "Problema de calibración de mercado y estructura implícita del modelo de bonos de Black-Cox = Market Calibration Problem and the Implied Structure of the Black-Cox Bond Model," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 10(1), pages 73-98, December.

    More about this item

    Keywords

    Credit risk; structural models; excursion approach; default threshold; default probability.;

    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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