A market-based framework for bankruptcy prediction

Journal of Financial Stability

Volumn 3, Issue 2, 2007, Pages 85-131

  Reisz, Alexander S ^a   Perlich, Claudia ^b  

^a OFFICE OF THE COMPTROLLER OF THE CURRENCY   (United States)

^b IBM T J WATSON RESEARCH CENTER   (United States)

Author keywords

Barrier option; Discriminatory power; Probability of default; Recalibration; Structural models

Indexed keywords

EID: 34347328315     PISSN: 15723089     EISSN: None     Source Type: Journal    
DOI: 10.1016/j.jfs.2007.02.001     Document Type: Article

References (74)

1. Akaike H. A new look at the statistical model identification. IEEE Trans. Auto. Contrl. 19 (1974) 716-723
2. Altman E.I. Financial ratios, discriminant analysis, and the prediction of corporate bankruptcy. J. Finance 4 (1968) 589-609
3. Altman E.I. Corporate Financial Distress and Bankruptcy. second ed. (1993), Wiley Finance, New York
4. Altman E.I., and Kishore V.M. Almost everything you wanted to know about recoveries on defaulted bonds. Financial Anal. J. 52 (1996) 57-64
5. Anderson R., and Sundaresan S. Design and valuation of debt contracts. Rev. Financial Studies 9 (1996) 37-68
6. Andrade G., and Kaplan S. How costly is financial (not economic) distress? Evidence from highly levered transactions that became distressed. J. Finance 53 (1998) 1443-1493
7. Avellaneda, M., Zhu, J., 2001. Modeling the distance-to-default process of a firm. RISK Magazine.
8. Barclay M.J., and Smith C.W. The maturity structure of corporate debt. J. Finance 50 (1995) 609-631
9. Bensoussan A., Crouhy M., and Galai D. Stochastic equity volatility and the capital structure of the firm. In: Howison S.D., Kelly F.P., and Wilmott P. (Eds). Mathematical Models in Finance (1995), The Royal Society/Chapman and Hall 81-92
10. Bhanot K. Pricing corporate bonds with rating-based covenants. J. Fixed Income 12 (2003) 57-64
11. Black F., and Scholes M. The pricing of options and corporate liabilities. J. Pol. Econ. 81 (1973) 637-659
12. Black F., and Cox J.C. Valuing corporate securities: some effects of bond indenture provisions. J. Finance 31 (1976) 351-367
13. Brockman P., and Turtle H.J. A barrier option framework for corporate security valuation. J. Financial Econ. 67 (2003) 511-529
14. Chesney M., Jeanblanc-Piqué M., and Yor M. Brownian excursions and Parisian barrier options. Adv. Appl. Probability 29 (1995) 165-184
15. Chesney M., and Gibson-Asner R. The investment policy and the pricing of equity in a levered firm: a re-examination of the contingent claims valuation approach. Eur. J. Finance 5 (1999) 95-107
16. Collin-Dufresne P., and Goldstein R. Do credit spreads reflect stationary leverage ratios?. J. Finance 56 (2001) 1929-1957
17. Core J., and Schrand C. The effect of accounting-based debt covenants on equity valuation. J. Account. Econ. 27 (1999) 1-34
18. Crosbie P.J., and Bohn J.R. Modeling Default Risk (2002), KMV Corporation, San Francisco
19. Cummins J.D., Grace M.F., and Phillips R.D. Regulatory solvency prediction in property-liability insurance: risk-based capital, audit ratios, and cash flow simulation. J. Risk Insurance 66 (1999) 417-458
20. Davydenko, S.A., 2005. When do firms default? A study of the default boundary. Working paper. London Business School.
21. Dichev I. Is the risk of bankruptcy a systematic risk?. J. Finance 53 (1998) 1131-1147
22. Dionne, G., Sadok L., Sofiane M., Madalina, P., 2006. Estimation of the default risk of publicly traded Canadian companies. Working paper 06-05. HEC Montréal.
23. Duan J.-C. Maximum likelihood estimation using price data of the derivative contract. Math. Finance 4 (1994) 155-167
24. Duffee G. The relation between Treasury yields and corporate bond yield spreads. J. Finance 53 (1998) 2225-2241
25. Duffie D., and Lando D. Term structure of credit spreads with incomplete accounting information. Econometrica 69 (2001) 633-664
26. Eberhart A.C., Moore W.T., and Roenfeldt R.L. Security pricing and deviations from the absolute priority rule in bankruptcy proceedings. J. Finance 45 (1990) 1457-1469
27. Eom Y.H., Helwege J., and Huang J. Structural models of corporate bond pricing: an empirical analysis. Rev. Financial Studies 17 (2004) 499-544
28. Ericsson J., and Reneby J. Estimating structural bond pricing models. J. Business 78 (2005) 707-735
29. Fan H., and Sundaresan S. Debt valuation, renegotiation, and optimal dividend policy. Rev. Financial Studies 13 (2000) 1057-1099
30. François P., and Morellec E. Capital structure and asset prices: some effects of bankruptcy procedures. J. Business 77 (2004) 387-411
31. Franks J.R., and Torous W.N. An empirical investigation of U.S. firms in reorganization. J. Finance 44 (1989) 747-769
32. Franks J.R., and Torous W.N. A comparison of financial recontracting in distressed exchanges and Chapter 11 reorganizations. J. Financial Econ. 35 (1994) 349-370
33. Galai D., and Masulis R. The option pricing model and the risk factor of stock. J. Financial Econ. 3 (1976) 53-81
34. Galai, D., Raviv, A., Wiener, Z., 2005. Liquidation triggers and the valuation of equity and debt. Unpublished working paper. Hebrew University Jerusalem.
35. Geske R. The valuation of compound options. J. Financial Econ. 7 (1978) 63-81
36. Giesecke K. Default and information. J. Econ. Dyn. Control 30 (2006) 2281-2303
37. Giesecke K. Credit risk modeling and valuation: an introduction. In: Shimko D. (Ed). Credit Risk: Models and Management vol. 2 (2004), Riskbooks, London
38. Gillan, S.L., Martin, J.D., 2004. Financial engineering, corporate governance, and the collapse of Enron. Unpublished working paper. University of Delaware.
39. Guedes J., and Opler T. The determinants of the maturity of corporate debt issues. J. Finance 51 (1996) 1809-1833
40. Hand D. Construction of Assessment of Classification Rules (1997), Wiley Series in Probability and Statistics, New York
41. Helwege J. How long do junk bonds spend in default?. J. Finance 54 (1999) 341-357
42. Hillegeist S.A., Keating E.K., Cram D.P., and Lundstedt K.G. Assessing the probability of bankruptcy. Rev. Accounting Studies 9 (2004) 5-34
43. Huang, J.-Z., Huang, M., 2003. How much of the corporate-Treasury yield spread is due to credit risk? Working paper. Graduate School of Business, Stanford University.
44. Hull J., Izzy N., and Alan W. Merton's model, credit risk, and volatility skews. J. Credit Risk 1 (2004) 1-27
45. Jensen M.C., and Meckling W.H. Theory of the firm: managerial behavior, agency costs and ownership structure. J. Financial Econ. 3 (1976) 305-360
46. John, K., Brito, J.A., 2000. Risk-avoidance induced by risky debt. Unpublished working paper. Stern School of Business, New York University.
47. Jones E.P., Mason S.P., and Rosenfeld E. Contingent claims analysis of corporate capital structures: an empirical investigation. J. Finance 39 (1984) 611-625
48. Kealhofer S. The Quantification of Credit Risk (2000), KMV Corporation, San Francisco
49. Kim I.J., Ramaswamy K., and Sundaresan S. Does default risk in coupons affect the valuation of corporate bonds? A contingent claims model. Financial Manage. 22 (1993) 117-131
50. Layish, D.N., 2001. A monitoring role for deviations from absolute priority in bankruptcy resolution. Unpublished Dissertation Thesis. Baruch College, City University of New York.
51. Leland H.E. Corporate debt value, bond covenants, and optimal capital structure. J. Finance 49 (1994) 987-1019
52. Leland, H.E., 2002. Predictions of expected default frequencies in structural models of debt. Unpublished working paper. Haas School of Business, University of California at Berkeley.
53. Leland H.E., and Toft K.B. Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads. J. Finance 51 (1996) 987-1019
54. Longstaff F.A., and Schwartz E.S. A simple approach to valuing risky fixed and floating rate debt. J. Finance 50 (1995) 789-819
55. Mella-Barral P., and Perraudin W. Strategic debt service. J. Finance 52 (1997) 531-556
56. Mello A.S., and Parsons J.E. Maturity structure of a hedge matters: lessons from the Metallgesellschaft debacle. J. Appl. Corporate Finance 8 (1995) 106-120
57. Merton R.C. On the pricing of corporate debt: the risk structure of interest rates. J. Finance 29 (1974) 449-470
58. Moody's Investors Services, 1999. The Evolving Meaning of Moody's Bond Ratings, Special Comment.
59. Moraux, F., 2002. Valuing corporate liabilities when the default threshold is not an absorbing barrier. Working paper. Université de Rennes I.
60. Nielsen, L.T., Saa-Requejo, J., Santa-Clara, P., 1993. Default risk and interest rate risk: the term structure of default spreads. Working paper. INSEAD.
61. Pan Y. Design and valuation of corporate securities with strategic debt service and asymmetric information. Int. J. Theor. Appl. Finance 2 (1999) 201-219
62. Reisz, A.S., 2001. Hitting the barrier, revisiting the contingent claim framework. Working paper. Center for Financial Studies, Frankfurt, Germany.
63. Rosset, S., 2004. Model selection via the AUC. In: International Conference on Machine Learning (ICML-04).
64. Saunders A., and Allen L. Credit Risk Measurement. second ed. (2002), Wiley Finance, New York
65. Schwarz G. Estimating the dimension of a model. Annal. Stat. 6 (1978) 461-464
66. Shumway T. Forecasting bankruptcy more accurately: a simple hazard model. J. Business 74 (2001) 101-124
67. Stein, R., 2002. Benchmarking default prediction models: pitfalls and remedies in model validation. Technical report #020305. Moody's Investor Services.
68. Stohs M.H., and Mauer D.C. The determinants of corporate debt maturity structure. J. Business 69 (1996) 279-312
69. Stulz, R. Should we fear derivatives? J. Econ. Persp., in press.
70. Vasicek O.A. EDF™ Credit Measure and Corporate Bond Pricing (2001), KMV Corporation, San Francisco
71. Vassalou M., and Xing Y. Default risk in equity returns. J. Finance 54 (2004) 831-868
72. Vuong Q. Likelihood ratio tests for model selection and non-nested hypotheses. Econometrica 57 (1989) 307-333
73. Weiss L.A. Bankruptcy resolution: direct costs and valuation of priority of claims. J. Financial Econ. 27 (1990) 285-314
74. Wong, H.Y., Choi, T.W., 2006. Estimating default barriers from market information. Working paper. Chinese University of Hong Kong.