A Structural Model of Default Risk

Posted: 20 Mar 2010 Last revised: 28 Dec 2016

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Jesus Saa-Requejo

Vega Asset Management LLC

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: November 2, 2010

Abstract

The authors price corporate debt from a structural model of firm default. They assume that the capital market brings about efficient firm default when the continuation value of the firm falls below the value it would have after bankruptcy restructuring. This characterization of default makes the model more tractable and parsimonious than the existing structural models. The model can be applied in conjunction with a broad range of default-free interest rate models to price corporate bonds. Closed-form corporate bond prices are derived for various parametric examples. The term structures of yield spreads and durations predicted by this model are consistent with the empirical literature. The authors illustrate the empirical performance of the model by pricing selected corporate bonds with varied credit ratings.

Keywords: Fixed Income, Default Risk, Corporate Bonds

JEL Classification: G10, G12

Suggested Citation

Hsu, Jason C. and Saa-Requejo, Jesus and Santa-Clara, Pedro, A Structural Model of Default Risk (November 2, 2010). Journal of Fixed Income, Vol. 19, No. 3, pp. 77-94, Winter 2010. Available at SSRN: https://ssrn.com/abstract=1574965

Jason C. Hsu (Contact Author)

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Jesus Saa-Requejo

Vega Asset Management LLC ( email )

Edificio Alfredo Mahou planta 23
Plaza Manuel Gomez Moreno 2
Madrid
Spain

Pedro Santa-Clara

New University of Lisbon - Nova School of Business and Economics ( email )

Lisbon
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~psc/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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