Valuation of Defaultable Claims - a Survey
Schmalenbach Business Review (sbr) - www.sbr-online.de, Vol. 54, January 2002
34 Pages Posted: 17 Jun 2002
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: Suggested Citation