Pricing defaultable bonds: a middle-way approach between structural and reduced-form models

Cathcart, Lara; El-Jahel, Lina

doi:10.1080/14697680600670754

Cited by 27 publications

(34 citation statements)

References 38 publications

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“…Important industry models like KMV's Portfolio Manager or the JP Morgan's CreditMetrics model are based on this approach (see Crouhy, Glai and Mark, 2000 [42]for a comparative analysis of industry credit-risk models). Cathcart and El-Jahel, 2006 [30]) have shown that the two approaches (reduced-form and structural) are somewhat reconcilable. models to jointly model different yield curves (see e.g.…”

Section: Decomposing Spreads In Affine Term-structure Frameworkmentioning

confidence: 99%

“…29 Alternatively, as mentioned in Subection 1.1, the liquidity factor could be proxied by some observable factors. 30 However, according to Wang (2009) [129], usual liquidity proxies are able to explain only a minor part of the liquidity component. One may resort to intermediate -or mixed-approach, where part of the liquidity-factor dynamics is observable (through observed proxies) and part of it is latent.…”

Section: Liquidity Riskmentioning

confidence: 99%

“…The parameters estimated in this step are those entering Equations (29) and (30). Whereas all parameters -those defining µ, Φ, Σ and the transition probabilities π ij 's-could be estimated in a single step by maximising the log-likelihood, we resort to a faster sequential approach.…”

Section: Estimationmentioning

confidence: 99%

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Default, Liquidity and Crises: An Econometric Framework

Monfort

Renne

2011

SSRN Journal

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In this paper, extending the work by Gourieroux, Monfort and Polimenis (2006) [78], we present a general discrete-time affine framework aimed at jointly modeling yield curves that are associated with different issuers. The underlying fixed-income securities may differ in terms of credit quality and/or in terms of liquidity. The risk factors follow discrete-time Gaussian processes, with drifts and variance-covariance matrices that are subject to regime shifts described by a Markov chain with (historical) non-homogenous transition probabilities. While flexible, the model remains tractable and amenable to empirical estimation. This is illustrated by an application on euro-area government yields. Specifically, the common dynamics of ten euro-area government yield curves are estimated using weekly data spanning the period from 1999 to early 2010. The dynamics of the yield curves are satisfyingly explained by both observable factors and unobservable ones. Among the latter, we exhibit a euro-area-wide liquidity-related latent factor. The estimation results suggest that an important share of the changes in euro-area yield differentials is liquidity-driven.JEL codes: E43, E44, E47, G12, G24.

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Section: Decomposing Spreads In Affine Term-structure Frameworkmentioning

confidence: 99%

Section: Liquidity Riskmentioning

confidence: 99%

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Default, Liquidity and Crises: An Econometric Framework

Monfort

Renne

2011

SSRN Journal

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“…The third approach is to unify the structural and reduced form approaches. As for the history of the above three approaches and their advantages and shortcomings, readers can refer to [13] and the introductions of [3,12]. Combining the elements of the structural approach and reduced-form approach is one of the recent trends.…”

Section: Introductionmentioning

confidence: 99%

Analytical Pricing of Defaultable Discrete Coupon Bonds in Unified Model of Structural and Reduced Form Models (Two-Factor Model)

2013

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: Pricing formulae for defaultable corporate bonds with discrete coupons under consideration of the government taxes in the united model of structural and reduced form models are provided. The aim of this paper is to generalize the comprehensive structural model for defaultable fixed income bonds (considered in [1]) into a comprehensive unified model of structural and reduced form models. Here we consider the one factor model and the two factor model. In the one factor model the bond holders receive the deterministic coupon at predetermined coupon dates and the face value (debt) and the coupon at the maturity as well as the effect of government taxes which are paid on the proceeds of an investment in bonds is considered under constant short rate. In the two factor model the bond holders receive the stochastic coupon (discounted value of that at the maturity) at predetermined coupon dates and the face value (debt) and the coupon at the maturity as well as the effect of government taxes which are paid on the proceeds of an investment in bonds is considered under stochastic short rate. The expected default event occurs when the equity value is not enough to pay coupon or debt at the coupon dates or maturity and unexpected default event can occur at the first jump time of a Poisson process with the given default intensity provided by a step function of time variable. We consider the model and pricing formula for equity value and using it calculate expected default barrier. Then we provide pricing model and formula for defaultable corporate bonds with discrete coupons and consider its duration and the effect of the government taxes.

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“…(See [3,4,6,7,9,12,13,14].) Cathcart et al [6] studied a pricing of corporate bonds in the case when the default intensity is a linear function of the interest rate and gave semi-analytical pricing formulae.…”

Section: Introductionmentioning

confidence: 99%

Integrals of Higher Binary Options and Defaultable Bonds with Discrete Default Information

Hyong-Chol

Kim

et al. 2013

SSRN Journal

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Abstract. In this article, we study the problem of pricing defaultable bond with discrete default intensity and barrier under constant risk free short rate using higher order binary options and their integrals. In our credit risk model, the risk free short rate is a constant and the default event occurs in an expected manner when the firm value reaches a given default barrier at predetermined discrete announcing dates or in an unexpected manner at the first jump time of a Poisson process with given default intensity given by a step function of time variable, respectively. We consider both endogenous and exogenous default recovery. Our pricing problem is derived to a solving problem of inhomogeneous or homogeneous Black-Scholes PDEs with different coefficients and terminal value of binary type in every subinterval between the two adjacent announcing dates. In order to deal with the difference of coefficients in subintervals we use a relation between prices of higher order binaries with different coefficients. In our model, due to the inhomogenous term related to endogenous recovery, our pricing formulae are represented by not only the prices of higher binary options but also the integrals of them. So we consider a special binary option called integral of i-th binary or nothing and then we obtain the pricing formulae of our defaultable corporate bond by using the pricing formulae of higher binary options and integrals of them.

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Pricing defaultable bonds: a middle-way approach between structural and reduced-form models

Cited by 27 publications

References 38 publications

Default, Liquidity and Crises: An Econometric Framework

Default, Liquidity and Crises: An Econometric Framework

Analytical Pricing of Defaultable Discrete Coupon Bonds in Unified Model of Structural and Reduced Form Models (Two-Factor Model)

Integrals of Higher Binary Options and Defaultable Bonds with Discrete Default Information

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