Modelling Default Risk: A New Structural Approach

12 Pages Posted: 8 Feb 2011

See all articles by Yildiray Yildirim

Yildiray Yildirim

Zicklin School of Business, Baruch College - The City University of New York

Date Written: April 27, 2006

Abstract

This paper provides an alternative approach to the structural credit risk models. The first-passage-time approach extends the original Merton (Journal of Finance 29, 449-470) model by accounting for the fact that the default may occur not only at the debt's maturity, but also prior to this date. Default happens when the firm value process crosses an exhaust barrier. In contrast, this paper defines default as the first time the firm value process crosses a barrier, and the area under the barrier is greater than the exogenous level. This technique is used to price risky debt as an example.

Keywords: Credit risk, Structural model, Brownian area

JEL Classification: G12, G13, G33

Suggested Citation

Yildirim, Yildiray, Modelling Default Risk: A New Structural Approach (April 27, 2006). Finance Research Letters, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1755596

Yildiray Yildirim (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
126
Abstract Views
953
rank
233,114
PlumX Metrics