Risk-neutral and actual default probabilities with an endogenous bankruptcy jump-diffusion model

Asia-Pacific Financial Markets

Volumn 13, Issue 1, 2006, Pages 11-39

  Le Courtois, Olivier ^a   Quittard Pinon, François ^b,c  

^a EMLYON BUSINESS SCHOOL   (France)

^b UNIVERSITÉ LYON 1   (France)

^c NONE   (France)

Author keywords

Cumulative default probability; Endogenous capital structure; Esscher transform; Jump diffusion; Kou processes; Structural model

Indexed keywords

EID: 33947206510     PISSN: 13872834     EISSN: None     Source Type: Journal    
DOI: 10.1007/s10690-007-9033-1     Document Type: Review

References (34)

1. Altman, E. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(3), 589-609.
2. Black, F., & Cox, J. (1976). Valuing corporate securities: Some effects of bond indenture provisions. Journal of Finance, 31(2), 351-367. Chen, N., & Kou, S. G. (2005). Credit spreads, optimal capital structure, and implied volatility with endogenous default and jump risk. Working paper.
3. Collin-Dufresne, P., & Goldstein, R. (2001). Do credit spreads reflect stationary leverage ratios. Journal of Finance, 56(5), 1929-1958.
4. Crouhy, M., Galai, D., & Mark, R.(2000). A comparative analysis of current credit risk models. Journal of Banking and Finance, 24, 59-117.
5. Dao, T. B., & Jeanblanc, M. (2005). A double exponential structural jump diffusion model with endogenous default barrier. Working paper.
6. Duffle, D., & Singleton, K. (1999). Modeling term structures of defaultable bonds. Review of Financial Studies, 12, 687-720.
7. Eom, Y. H., Helwege, S., & Huang, J. (2003). Structural models of corporate bond pricing: An empirical analysis. Review of Financial Studies, 17(2), 499-544.
8. Fujiwara, T., & Miyahara, Y. (2003). The minimal entropy martingale measures for geometric Levy processes. Finance and Stochastics, 7, 509-531
9. Gerber, H., & Shiu, E. S. (1994). Option pricing by Esscher transforms. Transactions of the Society of Actuaries, 45(1), 99-191.
10. Hilberink, B., & Rogers L. (2002). Optimal capital structure and endogenous default. Finance and Stochastics, 6(2), 237-263.
11. Huang, J.-Z., & Huang, M. (2003). How much of the corporate-treasury yield spread is due to credit risk. Working paper.
12. Hull, J. C., Predescu, M., & White, A. (2005). Bond prices, default probabilities, and risk premiums. Journal of Credit Risk, 1(2), 53-60.
13. Jarrow, R. A., Lando, D., & Turnbull, S. M. (1997). A Markov model for the term structure of credit risk spreads. Review of Financial Studies, 10, 481-523.
14. Jarrow, R. A., & Protter, P. (2004). Structural versus reduced form models: A new information based perspective. Journal of Investment Management, 2(2), 1-10.
15. Kou, S. (2002). A jump diffusion model for option pricing. Management Science, 48, 1086-1101.
16. Kou, S. G., Petrella, G., & Wang, H. (2005). Pricing path dependent options with jump risk via Laplace transforms. Kyoto Economic Review, 76(1), 1-23.
17. Kou, S. G., & Wang, H. (2003). First passage times of a jump diffusion process. Advances in Applied Probability, 35, 504-531.
18. Kou, S. G., & Wang, H. (2004). Option pricing under a double exponential jump diffusion model. Management Science, 50(9), 1178-1192.
19. Leland, H. (1994a). Corporate debt value, bond covenants, and optimal capital structure. Journal of Finance, 49, 1213-1252.
20. Leland, H. (1994b). Bond prices, yield spreads, and optimal capital structure with default risk. Working paper no. 240, IBER, University of California, Berkeley.
21. Leland, H. (2004). Predictions of default probabilities in structural models of debt. Journal of Investment Management, 2(2), 5-20.
22. Leland, H., & Toft, K. (1996). Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads. Journal of Finance, 51(3), 987-1019.
23. Longstaff, F. A., Mithal, S., & Neis, E. (2005). Corporate yield spreads: Default risk or liquidity? New evidence from the credit default swap market. Journal of Finance, 60(5), 2213-2253.
24. Longstaff, F., & Schwartz, E. (1995). A simple approach to valuing risky fixed and floating rate debt. Journal of Finance, 50, 789-819.
25. Madan, D., Unal, H. (1998). Pricing the risks of default. The Review of Derivatives Research, 2, 121-160.
26. Merton, R. (1974). On the pricing of corporate debt: The risk structure of interest rates. Journal of Finance, 29, 449-470
27. Miyahara, Y. (2001). [Geometric Lévy Process & MEMM] pricing model and related estimation problems. Asia-Pacific Financial Markets, 8(1), 45-60.
28. Miyahara, Y. (2004). A note on Esscher transformed martingale measures for geometric Lévy processes. Discussion papers in Economics, Nagoya City University, No. 379, pp. 1-14.
29. Miyahara, Y. (2005). Martingale measures for geometric Levy process models. Discussion papers in Economics, Nagoya City University, No. 431, pp. 1-14.
30. Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. American Economic Review, 48(3), 261-297.
31. Moody's Investors Service (1997). Historical default rates of corporate bond issuers, 1920-1996.
32. Nielsen, L., Saa-Requejo, J., & Santa-Clara, P. (1993). Default risk and interest rate risk: the term structure of default spreads. Working paper.
33. Scherer, M. (2005). A structural credit risk model based on a jump diffusion. Working paper.
34. Usabel, M. (1999). Calculating multivariate ruin probabilities via Gaver-Stehfest inversion technique. Insurance: Mathematics and Economics, 25(2), 133-142.