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A latent process model for the pricing of corporate securities

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  • 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
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    References listed on IDEAS

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    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.

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