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Estimating structural bond pricing models via simulated maximum likelihood

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  • Bruche, Max

Abstract

This paper describes how structural bond pricing models can be estimated using a Simulated Maximum Likelihood procedure developed by Durbin and Koopman (1997). The approach has the advantage that price dated on any traded claim (such as bonds, equity, and credit default swaps), as well as information about the balance sheet (e.g. accounting data) can be used in the estimation, improving efficiency. Monte Carlo evidence as well as a small application to real data indicates that this approach is superior to both traditional estimation methods and recently proposed versions of Maximum Likelihood Estimation (Ericsson, Reneby 2002)

Suggested Citation

  • Bruche, Max, 2005. "Estimating structural bond pricing models via simulated maximum likelihood," LSE Research Online Documents on Economics 24647, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:24647
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    File URL: http://eprints.lse.ac.uk/24647/
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    References listed on IDEAS

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    Cited by:

    1. Han-Hsing Lee & Kuanyu Shih & Kehluh Wang, 2016. "Measuring sovereign credit risk using a structural model approach," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1097-1128, November.
    2. Han-Hsing Lee & Ren-Raw Chen & Cheng Few Lee, 2020. "Empirical Studies of Structural Credit Risk Models and the Application in Default Prediction: Review and New Evidence," World Scientific Book Chapters, in: Cheng Few Lee & John C Lee (ed.), HANDBOOK OF FINANCIAL ECONOMETRICS, MATHEMATICS, STATISTICS, AND MACHINE LEARNING, chapter 50, pages 1845-1901, World Scientific Publishing Co. Pte. Ltd..
    3. Forte, Santiago & Lovreta, Lidija, 2012. "Endogenizing exogenous default barrier models: The MM algorithm," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1639-1652.
    4. Kyriakos Georgiou & Athanasios N. Yannacopoulos, 2023. "Probability of Default modelling with L\'evy-driven Ornstein-Uhlenbeck processes and applications in credit risk under the IFRS 9," Papers 2309.12384, arXiv.org.
    5. Maclachlan, Iain C, 2007. "An empirical study of corporate bond pricing with unobserved capital structure dynamics," MPRA Paper 28416, University Library of Munich, Germany.
    6. Abel Elizalde, 2006. "Credit Risk Models II: Structural Models," Working Papers wp2006_0606, CEMFI.
    7. Forte, Santiago, 2006. "Credit spreads: theory and evidence about the information content of stocks, bonds and cdss," DEE - Working Papers. Business Economics. WB wb063310, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.

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    More about this item

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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