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Valuation of Defaultable Claims - A Survey

Schmalenbach Business Review (sbr) - www.sbr-online.de, Vol. 54, January 2002

34 Pages Posted: 17 Jun 2002  

Marliese Uhrig-Homburg

Karlsruhe Institute of Technology (KIT) - Institute for Finance

Abstract

The literature on default-claim pricing falls into three categories. Building on the classical Merton model, the structural approach models the dynamics of the asset value and assumes that default is triggered when the equity value reaches an exogenous asset level. In a second class of structural models, the firm itself derives a default boundary endogenously. Finally, in the reduced-form approach default occurs according to an exogenous hazard rate process. In this paper I survey the default-claim literature. I provide a general valuation framework for default-claim pricing. I then give an example designed to clarify the main difference between the structural and the reduced-form approach. For each model category I show how current pricing models fit into my general framework, describe the applicable papers in some detail, and discuss related extensions.

JEL Classification: G13

Suggested Citation

Uhrig-Homburg, Marliese, Valuation of Defaultable Claims - A Survey. Schmalenbach Business Review (sbr) - www.sbr-online.de, Vol. 54, January 2002. Available at SSRN: https://ssrn.com/abstract=313563 or http://dx.doi.org/10.2139/ssrn.313563

Marliese Uhrig-Homburg (Contact Author)

Karlsruhe Institute of Technology (KIT) - Institute for Finance ( email )

P.O. Box 6980
D-76049 Karlsruhe, DE
Germany
+49 721 6084 8183 (Phone)
+49 721 6084 8190 (Fax)

HOME PAGE: http://derivate.fbv.kit.edu/english/index.php

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