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Author :
Publisher :
ISBN 13 :
Total Pages : 55 pages
Book Rating : 4.:/5 (836 download)
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:
Author : Ka Leung Li
Publisher :
ISBN 13 :
Total Pages : 51 pages
Book Rating : 4.:/5 (129 download)
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.
Author : Dan Galai
Publisher : World Scientific Publishing Company
ISBN 13 : 9789814730723
Total Pages : 2036 pages
Book Rating : 4.7/5 (37 download)
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).
Author : João C. A. Teixeira
Publisher :
ISBN 13 :
Total Pages : 43 pages
Book Rating : 4.:/5 (129 download)
Download or read book An Empirical Analysis of Structural Models of Corporate Debt Pricing written by João C. A. Teixeira and published by . This book was released on 2005 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper tests empirically the performance of three structural models of corporate bond pricing, namely Merton (1974), Leland (1994) and Fan and Sundaresan (2000). While the first two models overestimate bond prices, the Fan and Sundaresan model reveals an extremely good performance. When considering the prediction of credit spreads, the three models under-estimate market spreads but, again, Fan and Sundaresan has a better performance. We find rating, maturity and asset volatility effects in the prediction power, as the models under-estimate less the spreads of riskier firms and of bonds with better rating quality and longer maturity. Moreover, our results reveal the existence of a new industry effect. Spread errors are systematically related to some bond- and firm-specific variables, as well as term structure variables.
Author :
Publisher :
ISBN 13 :
Total Pages : 88 pages
Book Rating : 4.:/5 (469 download)
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:
Author : Max Elmer Bruche
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (1 download)
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:
Author : Steven C. J. Simon
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)
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.
Author : Edwin J. Elton
Publisher :
ISBN 13 :
Total Pages : 45 pages
Book Rating : 4.:/5 (129 download)
Download or read book Corporate Bonds written by Edwin J. Elton and published by . This book was released on 2008 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: The valuation of corporate debt is an important issue in asset pricing. While there has been an enormous amount of theoretical modeling of corporate bond prices, there has been relatively little empirical testing of these models. Recently there has been extensive development of rating based reduced form models. These models take as a premise that bonds when grouped by ratings are homogeneous with respect to risk. For each risk group the models require estimates of several characteristics such as the spot yield curve, the default probabilities and the recovery rate. These estimates are then used to compute the theoretical price for each bond in the group. The purpose of this article is to examine the pricing of corporate bonds when bonds are grouped by ratings, and to investigate the ability of characteristics, in addition to bond ratings, to improve the performance of rating based models. Most of our testing will be conducted in models which are in the spirit of the theory developed by Duffie and Singleton (1997) and Duffie (1999).The paper is divided into three sections. In the first section, we discuss various reduced form models that have been suggested in the literature. In the second section we examine how well standard classifications serve as a metric for forming homogeneous groups. In this section we show that using standard classifications results in errors being systematically related to specific bond characteristics. Finally, in the last section we take account of these specific bond characteristics in our estimation procedure for determining spot prices and show how this lead to improved estimates of corporate bond prices.
Author : Riccardo Rebonato
Publisher : Cambridge University Press
ISBN 13 : 1316732959
Total Pages : 781 pages
Book Rating : 4.3/5 (167 download)
Download or read book Bond Pricing and Yield Curve Modeling written by Riccardo Rebonato and published by Cambridge University Press. This book was released on 2018-06-07 with total page 781 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this book, well-known expert Riccardo Rebonato provides the theoretical foundations (no-arbitrage, convexity, expectations, risk premia) needed for the affine modeling of the government bond markets. He presents and critically discusses the wealth of empirical findings that have appeared in the literature of the last decade, and introduces the 'structural' models that are used by central banks, institutional investors, sovereign wealth funds, academics, and advanced practitioners to model the yield curve, to answer policy questions, to estimate the magnitude of the risk premium, to gauge market expectations, and to assess investment opportunities. Rebonato weaves precise theory with up-to-date empirical evidence to build, with the minimum mathematical sophistication required for the task, a critical understanding of what drives the government bond market.
Author : V. Vance Roley
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (119 download)
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.
Author : Jan Ericsson
Publisher :
ISBN 13 :
Total Pages : 70 pages
Book Rating : 4.:/5 (129 download)
Download or read book Estimating Structural Bond Pricing Models written by Jan Ericsson and published by . This book was released on 2002 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: A difficulty which arises when implementing structural bond pricing models is the estimation of the value and risk of the firm's assets - neither of which is directly observable. We perform a simulation experiment in order to evaluate a maximum likelihood method applicable to this problem. The properties of the bond price estimators are examined using four theoretical bond pricing models: the Black amp; Scholes (1973) / Merton (1974) model, the Leland amp; Toft (1996) model, the Briys amp; de Varenne (1997) model, as well as the Ericsson amp; Reneby (2001) model. We contrast the performance of the maximum likelihood estimators to that of estimators traditionally used in academia and industry. The results are strongly supportive of the maximum likelihood approach. In fact, the inefficiency of the traditional estimator may explain the failure of past attempts to implement structural bond pricing models.
Author : Max Bruche
Publisher :
ISBN 13 :
Total Pages : 29 pages
Book Rating : 4.:/5 (254 download)
Download or read book Estimating Structural Bond Pricing Models Via Simulated Maximum Likelihood written by Max Bruche and published by . This book was released on 2005 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Author : Young Ho Eom
Publisher :
ISBN 13 :
Total Pages : 48 pages
Book Rating : 4.:/5 (548 download)
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:
Author : Young Ho Eom
Publisher :
ISBN 13 :
Total Pages : 0 pages
Book Rating : 4.:/5 (548 download)
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:
Author : Ricardo Alexandre Martins Gomes Pereira
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (89 download)
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:
Author : Edwin J. Elton
Publisher :
ISBN 13 :
Total Pages : 44 pages
Book Rating : 4.:/5 (129 download)
Download or read book Factors Affecting the Valuation of Corporate Bonds written by Edwin J. Elton and published by . This book was released on 2008 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt: The valuation of corporate debt is an important issue in asset pricing. While there has been an enormous amount of theoretical modeling of corporate bond prices, there has been relatively little empirical testing of these models. Recently there has been extensive development of rating based models as a type of reduced form model. These models take as a premise that groups of bonds can be identified which are homogeneous with respect to risk. For each risk group the models require estimates of several characteristics such as the spot yield curve, the default probabilities and the recovery rate. These estimates are then used to compute the theoretical price for each bond in the group. The purpose of this article is to clarify some of the differences among these models, to examine how well they explain prices, and to examine how to group bonds to most effectively estimate prices.
Author : Ronald Anderson
Publisher :
ISBN 13 :
Total Pages : 21 pages
Book Rating : 4.:/5 (91 download)
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:
