Implementing Structural Credit Risk Models Using Both Stock and Bond Prices - an Empirical Study
Posted: 28 Feb 2004
Reduced form credit risk models are often thought to be better suited for pricing corporate bonds than structural models. In this paper we challenge this view; by conditioning not only on equity but also on bond and dividend information, our structural model performs well in comparison to previously tested reduced form models. Moreover, we consider pricing of bond portfolios and show that model errors are to a large extent diversifiable.
Keywords: Credit risk, yield spreads, structural models
JEL Classification: G12, G13, G33
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