IDEAS home Printed from https://ideas.repec.org/a/spr/mathme/v69y2009i3p439-455.html
   My bibliography  Save this article

A latent process model for the pricing of corporate securities

Author

Listed:
  • Masaaki Kijima
  • Teruyoshi Suzuki
  • Keiichi Tanaka

Abstract

We propose a structural model with a joint process of tangible assets (marker) and firm status for the pricing of corporate securities. The firm status is assumed to be latent or unobservable, and default occurs when the firm status process reaches a default threshold at the first time. The marker process is observable and assumed to be correlated with the latent firm status. The recovery upon default is a fraction of tangible assets at the time of default. Our model can evaluate both the corporate debt and equity to fit their market prices in a unified framework. When the two processes are perfectly correlated, our model is reduced to the seminal Black–Cox model. Numerical examples are given to support the usefulness of our model. Copyright Springer-Verlag 2009

Suggested Citation

  • Masaaki Kijima & Teruyoshi Suzuki & Keiichi Tanaka, 2009. "A latent process model for the pricing of corporate securities," Mathematical Methods of Operations Research, Springer;Gesellschaft für Operations Research (GOR);Nederlands Genootschap voor Besliskunde (NGB), vol. 69(3), pages 439-455, July.
    • Handle: RePEc:spr:mathme:v:69:y:2009:i:3:p:439-455
    DOI: 10.1007/s00186-008-0246-5
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00186-008-0246-5
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s00186-008-0246-5?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. Briys, Eric & de Varenne, François, 1997. "Valuing Risky Fixed Rate Debt: An Extension," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(2), pages 239-248, June.
    2. Madan, Dilip & Unal, Haluk, 2000. "A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(1), pages 43-65, March.
    3. Mel‐Ling Ting Lee & Victor DeGruttola & David Schoenfeld, 2000. "A model for markers and latent health status," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 62(4), pages 747-762.
    4. Leland, Hayne E, 1994. "Corporate Debt Value, Bond Covenants, and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 49(4), pages 1213-1252, September.
    5. 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.
    6. 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.
    7. Merton, Robert C., 1976. "Option pricing when underlying stock returns are discontinuous," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 125-144.
    8. Mella-Barral, Pierre & Perraudin, William, 1997. "Strategic Debt Service," Journal of Finance, American Finance Association, vol. 52(2), pages 531-556, June.
    9. Robert A. Jarrow & Stuart M. Turnbull, 2008. "Pricing Derivatives on Financial Securities Subject to Credit Risk," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 17, pages 377-409, World Scientific Publishing Co. Pte. Ltd..
    10. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    11. Giesecke, Kay, 2004. "Correlated default with incomplete information," Journal of Banking & Finance, Elsevier, vol. 28(7), pages 1521-1545, July.
    12. M. Kijima & T. Suzuki, 2001. "A jump-diffusion model for pricing corporate debt securities in a complex capital structure," Quantitative Finance, Taylor & Francis Journals, vol. 1(6), pages 611-620.
    13. Masaaki Kijima, 1998. "Monotonicities in a Markov Chain Model for Valuing Corporate Bonds Subject to Credit Risk," Mathematical Finance, Wiley Blackwell, vol. 8(3), pages 229-247, July.
    14. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    15. Longstaff, Francis A & Schwartz, Eduardo S, 1995. "A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
    16. Zhou, Chunsheng, 2001. "The term structure of credit spreads with jump risk," Journal of Banking & Finance, Elsevier, vol. 25(11), pages 2015-2040, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Masaaki Kijima & Chi Chung Siu, 2014. "Credit-Equity Modeling Under A Latent Lévy Firm Process," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 17(03), pages 1-41.
    2. Masahiko Egami & Rusudan Kevkhishvili, 2020. "Post-Last Exit Time Process and its Application to Loss-Given-Default Distribution," Papers 2009.00868, arXiv.org, revised Mar 2024.

    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. Moraux, Franck, 2004. "Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing," International Review of Financial Analysis, Elsevier, vol. 13(1), pages 47-61.
    2. Nan Chen & S. G. Kou, 2009. "Credit Spreads, Optimal Capital Structure, And Implied Volatility With Endogenous Default And Jump Risk," Mathematical Finance, Wiley Blackwell, vol. 19(3), pages 343-378, July.
    3. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011, January-A.
    4. Abel Elizalde, 2006. "Credit Risk Models II: Structural Models," Working Papers wp2006_0606, CEMFI.
    5. Nystrom, Kaj & Skoglund, Jimmy, 2006. "A credit risk model for large dimensional portfolios with application to economic capital," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2163-2197, August.
    6. Antonio Trujillo-Ponce & Reyes Samaniego-Medina & Clara Cardone-Riportella, 2014. "Examining what best explains corporate credit risk: accounting-based versus market-based models," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 15(2), pages 253-276, April.
    7. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5, July-Dece.
    8. Jarrow, Robert A. & Turnbull, Stuart M., 2000. "The intersection of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 271-299, January.
    9. Tahir Choulli & Catherine Daveloose & Michèle Vanmaele, 2020. "A martingale representation theorem and valuation of defaultable securities," Mathematical Finance, Wiley Blackwell, vol. 30(4), pages 1527-1564, October.
    10. 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.
    11. Batten, Jonathan & Hogan, Warren, 2002. "A perspective on credit derivatives," International Review of Financial Analysis, Elsevier, vol. 11(3), pages 251-278.
    12. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    13. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    14. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    15. Reisz, Alexander S. & Perlich, Claudia, 2007. "A market-based framework for bankruptcy prediction," Journal of Financial Stability, Elsevier, vol. 3(2), pages 85-131, July.
    16. Catherine Refait, 2000. "Estimation du risque de défaut par une modélisation stochastique du bilan : Application à des firmes industrielles françaises," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-03718527, HAL.
    17. Giesecke, Kay, 2006. "Default and information," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2281-2303, November.
    18. Elisa Di Febo & Eliana Angelini, 2018. "The Relevance of Market Variables in the CDS Spread Volatility: An Empirical Post-crisis Analysis," Global Business Review, International Management Institute, vol. 19(6), pages 1462-1477, December.
    19. Olivier Courtois & Xiaoshan Su, 2020. "Structural Pricing of CoCos and Deposit Insurance with Regime Switching and Jumps," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 27(4), pages 477-520, December.
    20. repec:wyi:journl:002109 is not listed on IDEAS
    21. Qiang Dai & Kenneth Singleton, 2003. "Term Structure Dynamics in Theory and Reality," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 631-678, July.

    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:spr:mathme:v:69:y:2009:i:3:p:439-455. 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: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    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.