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Do Structural Models For Corporate Bonds Work
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Book Synopsis Do Structural Models for Corporate Bonds Work? by : Steven C. J. Simon
Download or read book Do Structural Models for Corporate Bonds Work? written by Steven C. J. Simon and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent empirical results on calibrating structural models for corporate bonds have been mixed. Most authors find that such models significantly underestimate the default component in credit spreads, when they are calibrated to observed default frequencies. Others found that structural models tend to generate to high values for the default component when bond prices are used to estimate the asset-value volatility. Using a simulation experiment, Ericsson and Reneby (2005) show that the empirical performance of such models can be improved upon when calibrated by means of maximum likelihood. We test whether this is also the case when a structural model is calibrated to actual bond yields, rather than simulated data. The tests in this paper use the structural model of Leland and Toft (1996), which has been shown to do a good job at explaining observed default frequencies.A first set of results indicates that the superior performance of the maximum likelihood method is lost when it is confronted with a real-live data set, rather than with simulated data. More precisely, implied default spreads seem too high. However, forcing the model to replicate observed default frequencies, significantly improves the results. We find that in this case the implied default spreads seem to be unbiased estimates of the true default component of credit spreads.
Book Synopsis Structural Models of Corporate Bond Pricing by : Young Ho Eom
Download or read book Structural Models of Corporate Bond Pricing written by Young Ho Eom and published by . This book was released on 2003 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Structural Models of Corporate Bond Pricing by :
Download or read book Structural Models of Corporate Bond Pricing written by and published by . This book was released on 2000 with total page 88 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Structural Models of Credit Risk are Useful by : Ilya A. Strebulaev
Download or read book Structural Models of Credit Risk are Useful written by Ilya A. Strebulaev and published by . This book was released on 2007 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: It is well known that structural models of credit risk provide poor predictions of bond prices. We show that they may perform much better as a predictor of debt return sensitivities to equity. This is important since it gives us an opportunity to identify much better the reasons for model failure. The main result of this paper is that even the simplest of the structural models (Merton (1974)) produces hedge ratios that are in line with those observed empirically. As well as providing insight into the determinants of corporate bond prices our results are also useful to practitioners who wish to hedge their positions in corporate debt. The paper also shows that corporate bond prices are sensitive to some variables - e.g., VIX - in a way that appears unrelated to credit risk.
Book Synopsis Structural Models of Corporate Bond Pricing with Maximum Likelihood Estimation by : Ka Leung Li
Download or read book Structural Models of Corporate Bond Pricing with Maximum Likelihood Estimation written by Ka Leung Li and published by . This book was released on 2009 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper empirically examines the proxy, volatility-restriction (VR) and maximum likelihood (ML) approaches to implementing structural corporate bond pricing models, and documents that ML estimation is the best among the three implementation methods. Empirical studies using either the proxy approach or the VR method conclude that barrier-independent models significantly underestimate corporate bond yields. Although barrier-dependent models tend to overestimate the yield on average, they generate a sizable degree of underestimation. The present paper shows that the proxy approach is an upwardly biased estimator of the corporate assets and makes the empirical framework work systematically against structural models of corporate bond pricing. The VR approach may generate inconsistent corporate bond prices or may fail to give a positive corporate bond price for some structural models. When the Merton, LS, BD and LT models are implemented with ML estimation, we find substantial improvement in their performances. Our empirical analysis shows that the LT model is very accurate for predicting short-term bond yields, whereas the LS and BD models are good predictors for medium-term and long-term bonds. The Merton model however significantly overestimates short-term bond yields and underestimates long-term bond yields. Unlike empirical studies in the past, the Merton model implemented with ML estimation does not consistently underestimate corporate bond yields.
Book Synopsis A Comparative Study of Structural Models of Corporate Bond Yields by : Ronald Anderson
Download or read book A Comparative Study of Structural Models of Corporate Bond Yields written by Ronald Anderson and published by . This book was released on 1999 with total page 21 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Calibration of the Structural Model of Corporate Bond Spreads by : Peter Lerner
Download or read book Calibration of the Structural Model of Corporate Bond Spreads written by Peter Lerner and published by . This book was released on 2005 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: It has been long recognized that endogenous default probabilities cannot explain spreads between corporate and the riskless bonds. Recently, this issue has been subjected to rigorous scrutiny. Previous studies have found that for investment-grade debt, structural models explain only 15-25% of the observed spreads. On the other hand, for the high-yield debt, the structural models exaggerate actual spreads 1.5-2 times. These findings are perplexing because, while one could argue that factors other than default risk, e.g. illiquidity, can influence the spread for investment-grade bonds, it is difficult to justify the findings for junk bonds. In this paper, we offer an explanation to these puzzling results. Specifically, we account for the differential tax treatment of regular income and capital gains. In addition, we consider the uncertainty of the residual assets due bondholders, as well as the tax liability of the residual asset. We argue that the uncertainty in the claims on the future assets of the company in the case of potential default drives the spreads of an investment-grade debt as much as, if not more than, the probability of default.
Book Synopsis Structural Models of Corporate Bond Pricing by : Young Ho Eom
Download or read book Structural Models of Corporate Bond Pricing written by Young Ho Eom and published by . This book was released on 2003 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Structural Models of Corporate Bond Prices by : Max Elmer Bruche
Download or read book Structural Models of Corporate Bond Prices written by Max Elmer Bruche and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Structural Models of Corporate Bond Pricing by : Ricardo Alexandre Martins Gomes Pereira
Download or read book Structural Models of Corporate Bond Pricing written by Ricardo Alexandre Martins Gomes Pereira and published by . This book was released on 2008 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Implementing Structural Credit Risk Models Using Both Stock and Bond Prices - an Empirical Study by : Joel Reneby
Download or read book Implementing Structural Credit Risk Models Using Both Stock and Bond Prices - an Empirical Study written by Joel Reneby and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Reduced form credit risk models are often thought to be better suited for pricing corporate bonds than structural models. In this paper we challenge this view; by conditioning not only on equity but also on bond and dividend information, our structural model performs well in comparison to previously tested reduced form models. Moreover, we consider pricing of bond portfolios and show that model errors are to a large extent diversifiable.
Book Synopsis Contingency Approaches to Corporate Finance by : Dan Galai
Download or read book Contingency Approaches to Corporate Finance written by Dan Galai and published by World Scientific Publishing Company. This book was released on 2019-01-30 with total page 2036 pages. Available in PDF, EPUB and Kindle. Book excerpt: Black and Scholes (1973) and Merton (1974) (hereafter referred to as BSM) introduced the contingent claim approach (CCA) to the valuation of corporate debt and equity. The BSM modeling framework is also named the 'structural' approach to risky debt valuation. The CCA approach considers all stakeholders of the corporation as holding contingent claims on the assets of the corporation. Each claim holder has different priorities, maturities and conditions for payouts. It is based on the principle that all the assets belong to all the liability holders.In the structural approach the arrival of the default event relies on economic arguments for why firms default as it is explicitly related to the dynamics of the economic value of the firm. A standard structural model of default timing assumes that a corporation defaults when its assets drop to a sufficiently low level relative to its liabilities.The BSM modeling framework gives the basic fundamental version of the structural model where default is assumed to occur when the net asset value of the firm at the maturity of the pure-discount debt becomes negative, i.e., market value of the assets of the firm falls below the market value of the firm's liabilities. In a regime of limited liability, the shareholders of the firm have the option to default on the firm's debt. Equity can be viewed as a European call option on the firm's assets with a strike price equal to the face value of the firm's debt. Actually, CCA can be used to value all the components of the firm's liabilities. Option pricing models are used to value stocks, bonds, and many other types of corporate claims.Different versions of the model correspond to different assumptions about the conditions when a firm defaults. Merton (1974) assumes that the firm only defaults at the maturity date of the firm's outstanding debt when the net asset value of the firm, in market value terms, is negative. Others introduce other conditions for default. Also, different authors introduce more complicated capital structure with different kinds of bonds (e.g. senior and junior), warrants, corporate taxes, ESOP, and more. Volume 1: Foundations of CCA and Equity ValuationVolume 1 presents the seminal papers of Black and Scholes (1973) and Merton (1973, 1974). This volume also includes papers that specifically price equity as a call option on the corporation. It introduces warrants, convertible bonds and taxation as contingent claims on the corporation. It highlights the strong relationship between the CCA and the Modigliani-Miller (M&M) Theorems, and the relation to the Capital Assets Pricing Model (CAPM). Volume 2: CCA Approach to Corporate Debt ValuationVolume 2 concentrates on corporate bond valuation by introducing various types of bonds with different covenants as well as introducing various conditions that trigger default. While empirical evidence indicates that the simple Merton's model underestimates the credit spreads, additional risk factors like jumps can be used to resolve it. Volume 3: Issues in Corporate Finance with CCA ApproachVolume 3 includes papers that look at issues in corporate finance that can be explained with the CCA approach. These issues include the effect of dividend policy on the valuation of debt and equity, the pricing of employee stock options and many other issues of corporate governance. Volume 4: CCA Approach to Banking and Financial IntermediationVolume 4 focuses on the application of the contingent claim approach to banks and other financial intermediaries. Regulation of the banking industry led to the creation of new financial securities (e.g., CoCos) and new types of stakeholders (e.g., deposit insurers).
Book Synopsis Estimating Structural Models of Corporate Bond Prices by :
Download or read book Estimating Structural Models of Corporate Bond Prices written by and published by . This book was released on 2006 with total page 55 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Corporate Bonds by : Richard C. Wilson
Download or read book Corporate Bonds written by Richard C. Wilson and published by John Wiley & Sons. This book was released on 1995-02-15 with total page 414 pages. Available in PDF, EPUB and Kindle. Book excerpt: Corporate Bonds: Structures & Analysis covers every aspect of corporate bonds, including bond structures, credit analysis, and investment strategies. This book discusses state-of-the-art technology for valuing corporate bonds, as well as innovative new products such as step-up notes and range notes. Complete with contributions from today's top financial experts, Corporate Bonds is the definitive reference for this vital market.
Book Synopsis A Structural Model of Default Risk by : Jason C. Hsu
Download or read book A Structural Model of Default Risk written by Jason C. Hsu and published by . This book was released on 2016 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: The authors price corporate debt from a structural model of firm default. They assume that the capital market brings about efficient firm default when the continuation value of the firm falls below the value it would have after bankruptcy restructuring. This characterization of default makes the model more tractable and parsimonious than the existing structural models. The model can be applied in conjunction with a broad range of default-free interest rate models to price corporate bonds. Closed-form corporate bond prices are derived for various parametric examples. The term structures of yield spreads and durations predicted by this model are consistent with the empirical literature. The authors illustrate the empirical performance of the model by pricing selected corporate bonds with varied credit ratings.
Book Synopsis Structural Models of Credit Risk are Useful by :
Download or read book Structural Models of Credit Risk are Useful written by and published by . This book was released on 2003 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A Disaggregated Structural Model of the Treasury Securities, Corporate Bond, and Equity Markets by : V. Vance Roley
Download or read book A Disaggregated Structural Model of the Treasury Securities, Corporate Bond, and Equity Markets written by V. Vance Roley and published by . This book was released on 1980 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: The estimation and simulation results of a disaggregated structural model of u\U.S. security markets are presented in this paper. The model consists of estimated demands for corporate bonds, equities, and four distinct maturity classes of Treasury securities by 11 categories of investors. The model is closed with the addition of six market-clearing identities equating market demands with exogenous supplies. The empirical results provide support to the model's specification and indicate that the "within-sample forecasts" of the six endogenous security yields closely track historical data.
