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An Empirical Assessment of a Simple ContingentClaims Model for the Valuation of Risky Debt

An Empirical Assessment of a Simple ContingentClaims Model for the Valuation of Risky Debt In this second installment, the author addresses some of the problems associated with empirically validating contingentclaim models for valuing risky debt. The article uses a simple contingent claims risky debt valuation model to fit term structures of credit spreads derived from data for U.S. corporate bonds. An essential component to fitting this model is the use of expected default frequency the estimate of the firms' expected default probability over a specific time horizon. The author discusses the statistical and econometric procedures used in fitting the term structure of credit spreads and estimating model parameters. These include iteratively reweighted nonlinear least squares are used to dampen the impact of outliers and ensure convergence in each crosssectional estimation from 1992 to 1999. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Risk Finance Emerald Publishing

An Empirical Assessment of a Simple ContingentClaims Model for the Valuation of Risky Debt

BOHN, JEFFREY R.
The Journal of Risk Finance , Volume 1 (4): 23 – Mar 1, 2000
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Publisher
Emerald Publishing
Copyright
Copyright © Emerald Group Publishing Limited
ISSN
1526-5943
DOI
10.1108/eb043456
Publisher site
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Abstract

In this second installment, the author addresses some of the problems associated with empirically validating contingentclaim models for valuing risky debt. The article uses a simple contingent claims risky debt valuation model to fit term structures of credit spreads derived from data for U.S. corporate bonds. An essential component to fitting this model is the use of expected default frequency the estimate of the firms' expected default probability over a specific time horizon. The author discusses the statistical and econometric procedures used in fitting the term structure of credit spreads and estimating model parameters. These include iteratively reweighted nonlinear least squares are used to dampen the impact of outliers and ensure convergence in each crosssectional estimation from 1992 to 1999.

Journal

The Journal of Risk Finance – Emerald Publishing

Published: Mar 1, 2000

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