The Valuation of Corporate Liabilities: Theory and Tests

61 Pages Posted: 6 Jul 2001

See all articles by Joel Reneby

Joel Reneby

Stockholm School of Economics - Department of Finance

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Date Written: December 19, 2002

Abstract

We develop a structural bond pricing approach and implement it on a large panel of US industrial bonds using an efficient maximum likelihood methodology. We evaluate the model's ability to predict yield spread levels and changes out-of-sample. Errors are smaller and distinctly less variable than those found in previous implementations of structural as well as reduced form models. Furthermore, our analysis provide evidence that bond yield spreads incorporate a substantial liquidity component on top of the default spread structural models are designed to capture.

Suggested Citation

Reneby, Joel and Ericsson, Jan, The Valuation of Corporate Liabilities: Theory and Tests (December 19, 2002). Available at SSRN: https://ssrn.com/abstract=275841 or http://dx.doi.org/10.2139/ssrn.275841

Joel Reneby (Contact Author)

Stockholm School of Economics - Department of Finance ( email )

SE-113 83 Stockholm
Sweden
+46 8 7369143 (Phone)
+46 8 312327 (Fax)

Jan Ericsson

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada
(514) 398-3186 (Phone)
(514) 398-3876 (Fax)

HOME PAGE: http://people.mcgill.ca/jan.ericsson/

Swedish Institute for Financial Research (SIFR)

Drottninggatan 89
SE-113 59 Stockholm, SE-113 60
Sweden

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