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Estimating the Price of Default Risk

Estimating the Price of Default Risk A firm's instantaneous probability of default is modeled as a translated square-root diffusion process modified to allow the process to be correlated with default-free interest rates. The parameters of the process are estimated for 161 firms. An extended Kalman filter approach is used that incorporates both the time-series and cross-sectional (term structure) properties of the individual firms' bond prices. The model is reasonably successful at fitting corporate bond yields, while key features of the term structures of yield spreads are captured in the signs and magnitudes of the resulting parameter estimates. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Financial Studies Oxford University Press

Estimating the Price of Default Risk

The Review of Financial Studies , Volume 12 (1) – Jan 1, 1999

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References (34)

Publisher
Oxford University Press
Copyright
© 1999 The Review of Financial Studies
ISSN
0893-9454
eISSN
1465-7368
DOI
10.1093/rfs/12.1.197
Publisher site
See Article on Publisher Site

Abstract

A firm's instantaneous probability of default is modeled as a translated square-root diffusion process modified to allow the process to be correlated with default-free interest rates. The parameters of the process are estimated for 161 firms. An extended Kalman filter approach is used that incorporates both the time-series and cross-sectional (term structure) properties of the individual firms' bond prices. The model is reasonably successful at fitting corporate bond yields, while key features of the term structures of yield spreads are captured in the signs and magnitudes of the resulting parameter estimates.

Journal

The Review of Financial StudiesOxford University Press

Published: Jan 1, 1999

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