IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v148y2016icp41-44.html
   My bibliography  Save this article

Corporate bond pricing model with stochastically volatile firm value process

Author

Listed:
  • Jang, Woon Wook
  • Eom, Young Ho
  • Kang, Yong Joo

Abstract

We propose a new structural model for corporate bond pricing that assumes stochastically volatile firm value process with before-maturity default possibility. We demonstrate the model’s potential using a simulation study and provide a semi-analytic solution method for the bond prices.

Suggested Citation

  • Jang, Woon Wook & Eom, Young Ho & Kang, Yong Joo, 2016. "Corporate bond pricing model with stochastically volatile firm value process," Economics Letters, Elsevier, vol. 148(C), pages 41-44.
    • Handle: RePEc:eee:ecolet:v:148:y:2016:i:c:p:41-44
    DOI: 10.1016/j.econlet.2016.09.018
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176516303639
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2016.09.018?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Black, Fischer & Cox, John C, 1976. "Valuing Corporate Securities: Some Effects of Bond Indenture Provisions," Journal of Finance, American Finance Association, vol. 31(2), pages 351-367, May.
    2. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    3. Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2009. "Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5099-5131, December.
    4. Jing-Zhi Huang & Zhan Shi & Hao Zhou, 2020. "Specification Analysis of Structural Credit Risk Models [Corporate bond valuation and hedging with stochastic interest rates and endogenous bankruptcy]," Review of Finance, European Finance Association, vol. 24(1), pages 45-98.
    5. Pierre Collin‐Dufresne & Robert S. Goldstein, 2001. "Do Credit Spreads Reflect Stationary Leverage Ratios?," Journal of Finance, American Finance Association, vol. 56(5), pages 1929-1957, October.
    6. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
    7. Young Ho Eom, 2004. "Structural Models of Corporate Bond Pricing: An Empirical Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 499-544.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Perrakis, Stylianos & Zhong, Rui, 2015. "Credit spreads and state-dependent volatility: Theory and empirical evidence," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 215-231.
    2. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    3. Zhijian (James) Huang & Yuchen Luo, 2016. "Revisiting Structural Modeling of Credit Risk—Evidence from the Credit Default Swap (CDS) Market," JRFM, MDPI, vol. 9(2), pages 1-20, May.
    4. Jing-Zhi Huang & Zhan Shi & Hao Zhou, 2020. "Specification Analysis of Structural Credit Risk Models [Corporate bond valuation and hedging with stochastic interest rates and endogenous bankruptcy]," Review of Finance, European Finance Association, vol. 24(1), pages 45-98.
    5. repec:wyi:journl:002109 is not listed on IDEAS
    6. Malek Ben-Abdellatif & Hatem Ben-Ameur & Rim Chérif & Bruno Rémillard, 2024. "A two-factor structural model for valuing corporate securities," Review of Derivatives Research, Springer, vol. 27(2), pages 203-225, July.
    7. Feldhütter, Peter & Schaefer, Stephen, 2023. "Debt dynamics and credit risk," Journal of Financial Economics, Elsevier, vol. 149(3), pages 497-535.
    8. Stylianos Perrakis & Rui Zhong, 2017. "Liquidity Risk and Volatility Risk in Credit Spread Models: A Unified Approach," European Financial Management, European Financial Management Association, vol. 23(5), pages 873-901, October.
    9. Stephen Zamore & Kwame Ohene Djan & Ilan Alon & Bersant Hobdari, 2018. "Credit Risk Research: Review and Agenda," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 54(4), pages 811-835, March.
    10. Jang, Bong-Gyu & Rhee, Yuna & Yoon, Ji Hee, 2016. "Business cycle and credit risk modeling with jump risks," Journal of Empirical Finance, Elsevier, vol. 39(PA), pages 15-36.
    11. Ramaprasad Bhar, 2010. "Stochastic Filtering with Applications in Finance," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7736, August.
    12. Benjamin Yibin Zhang & Hao Zhou & Haibin Zhu, 2009. "Explaining Credit Default Swap Spreads with the Equity Volatility and Jump Risks of Individual Firms," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 5099-5131, December.
    13. Giesecke, Kay & Longstaff, Francis A. & Schaefer, Stephen & Strebulaev, Ilya, 2011. "Corporate bond default risk: A 150-year perspective," Journal of Financial Economics, Elsevier, vol. 102(2), pages 233-250.
    14. Robert F. Engle & Emil N. Siriwardane, 2018. "Structural GARCH: The Volatility-Leverage Connection," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 449-492.
    15. Gregor Dorfleitner & Paul Schneider & Tanja Veža, 2011. "Flexing the default barrier," Quantitative Finance, Taylor & Francis Journals, vol. 11(12), pages 1729-1743.
    16. Davide E Avino & Enrique Salvador, 2024. "Contingent Claims and Hedging of Credit Risk with Equity Options," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 14(2), pages 310-348.
    17. T. C. Wong & C. H. Hui & C. F. Lo, 2009. "Discriminatory Power and Predictions of Defaults of Structural Credit Risk Models," Working Papers 342009, Hong Kong Institute for Monetary Research.
    18. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    19. Goldstein, Michael A. & Namin, Elmira Shekari, 2023. "Corporate bond liquidity and yield spreads: A review," Research in International Business and Finance, Elsevier, vol. 65(C).
    20. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    21. Zhou, Xinghua & Reesor, R. Mark, 2015. "Misrepresentation and capital structure: Quantifying the impact on corporate debt value," Journal of Corporate Finance, Elsevier, vol. 34(C), pages 293-310.

    More about this item

    Keywords

    Structural corporate bond pricing; Stochastic volatility; Fortet equation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:148:y:2016:i:c:p:41-44. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.