Estimating Structural Bond Pricing Models
70 Pages Posted: 15 May 2001
There are 2 versions of this paper
Estimating Structural Bond Pricing Models
Date Written: March 2002
Abstract
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 & Scholes (1973) / Merton (1974) model, the Leland & Toft (1996) model, the Briys & de Varenne (1997) model, as well as the Ericsson & 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.
Keywords: Credit Risk, Maximum Likelihood, Corporate Bonds
JEL Classification: G12, G13
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Explaining the Rate Spread on Corporate Bonds
By Edwin J. Elton, Martin J. Gruber, ...
-
The Determinants of Credit Spread Changes
By Pierre Collin-dufresne, J. Spencer Martin, ...
-
How Much of Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
How Much of the Corporate-Treasury Yield Spread is Due to Credit Risk?
By Jing-zhi Huang and Ming Huang
-
Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit-Default Swap Market
By Francis A. Longstaff, Sanjay Mithal, ...
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Equity Volatility and Corporate Bond Yields
By John Y. Campbell and Glen B. Taksler
-
Structural Models of Corporate Bond Pricing: An Empirical Analysis
By Young Ho Eom, Jing-zhi Huang, ...
-
By Roberto Blanco, Simon Brennan, ...