English, Article, Journal or magazine article edition: A Structural Model of the Term Structure of Credit Spreads with Stochastic Recovery and Contractual Design Hugues Pirotte

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Bookmark: http://trove.nla.gov.au/version/110893
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • A Structural Model of the Term Structure of Credit Spreads with Stochastic Recovery and Contractual Design
Author
  • Hugues Pirotte
Physical Description
  • preprint
Notes
  • This paper presents an alternative modelling of the term structure of the credit spreads under a structural approach. We rely upon the barrier option pricing frameworkto price a corporate zero-coupon bond with a stochastic present value of the recovery consistent with the evidence on the business cycle effects. Stochastic interest rates are therefore introduced through a two-factor model of the term structure of interest rates that impacts the assets value of the firm. Comparative statics with similar models such as Briys and de Varenne [1997] are provided thereafter. The pricing model is then shown to be related to the corporate context of an external funding requirement of an investment project leading to endogenous values of the dividend payout rate and the default threshold value. Finally, the asset volatility, which accounts for much of the credit risk in this class of models, is related to the stock market volatility through a backward use of the model therefore adding to its tractability whiletaking advantage of the liquidity and information dissemination in stock markets.
  • RePEc:sol:wpaper:99-002
Language
  • English
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