A Structural Approach without Path Dependency

27 Pages Posted: 6 Jul 2007  

Ryoichi Ikeda

University of Tokyo

Takao Kobayashi

University of Tokyo

Date Written: June 29, 2007

Abstract

This paper proposes a structural model to price credit risk of firms with short-term and long-term debts. In Ikeda, Kobayashi, and Takahashi (2005), since it assumed that the short-term debt is refunded by issuing a new short-term debt only, the future face value of the short-term debt depends on the path of asset value, which makes analysis very complicated. In order to avoid the problem, we build a new model without path dependency by assuming the future face values of short term debts to be fixed. Furthermore, by the improvement of the model, we show that the model can apply to the pricing of credit derivatives, and present the example of the pricing of a convertible bond.

Notes: Downloadable document is in Japanese.

Suggested Citation

Ikeda, Ryoichi and Kobayashi, Takao, A Structural Approach without Path Dependency (June 29, 2007). Available at SSRN: https://ssrn.com/abstract=997731 or http://dx.doi.org/10.2139/ssrn.997731

Ryoichi Ikeda (Contact Author)

University of Tokyo ( email )

7-3-1, Hongo, Bunkyo-ku
Tokyo, Tokyo 113-0033
Japan

Takao Kobayashi

University of Tokyo ( email )

Hongo 7-3-1
Bunkyo-ku
Tokyo, Tokyo 113-0033
United States

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