Can Structural Models Price Default Risk? New Evidence from Bond and Credit Derivative Markets

2005 ◽  
Author(s):  
Jan Ericsson ◽  
Joel Reneby ◽  
Hao Wang
Keyword(s):  
Default Risk ◽  
Structural Models ◽  
Credit Derivative ◽  
Derivative Markets ◽  
New Evidence

scholarly journals Can Structural Models Price Default Risk? Evidence from Bond and Credit Derivative Markets

2015 ◽  
Vol 05 (03) ◽  
pp. 1550007 ◽  
Author(s):  
Jan Ericsson ◽  
Joel Reneby ◽  
Hao Wang
Keyword(s):  
Default Risk ◽  
Structural Models ◽  
Credit Default Swap ◽  
Corporate Bond ◽  
Credit Default ◽  
Credit Derivative ◽  
Risk Free Rate ◽  
Derivative Markets ◽  
Bond Spreads ◽  
Free Rate

Using a set of structural models, we evaluate the price of default protection for a sample of US corporations. In contrast to previous evidence from corporate bond data, credit default swap (CDS) premia are not systematically underestimated. In fact, one of our studied models has little difficulty on average in predicting their level. For robustness, we perform the same exercise for bond spreads by the same issuers on the same trading date. As expected, bond spreads relative to the treasury curve are systematically underestimated. This is not the case when the swap curve is used as a benchmark, suggesting that previously documented underestimation results may be sensitive to the choice of risk-free rate.

Banks’ Risk Dynamics and Distance to Default

2019 ◽  
Vol 33 (6) ◽  
pp. 2421-2467 ◽  
Author(s):  
Stefan Nagel ◽  
Amiyatosh Purnanandam
Keyword(s):  
Default Risk ◽  
Structural Models ◽  
Return Volatility ◽  
Usual Assumption ◽  
Asset Volatility ◽  
Risk Dynamics ◽  
Asset Values ◽  
Distance To Default ◽  
Bank Equity ◽  
Risky Debt

Abstract We adapt structural models of default risk to take into account the special nature of bank assets. The usual assumption of lognormally distributed asset values is not appropriate for banks. Typical bank assets are risky debt claims with concave payoffs. Because of the payoff nonlinearity, bank asset volatility rises following negative shocks to borrower asset values. As a result, standard structural models with constant asset volatility can severely understate banks’ default risk in good times when asset values are high. Additionally, bank equity return volatility is much more sensitive to negative shocks to asset values than in standard structural models.

Revisiting Post-Downgrade Stock Underperformance

2016 ◽  
Vol 32 (2) ◽  
pp. 271-299 ◽  
Author(s):  
Alfred Zhu Liu ◽  
Le Sun
Keyword(s):  
Stock Returns ◽  
Default Risk ◽  
Recovery Effect ◽  
Bond Rating ◽  
Early Signal ◽  
Long Run ◽  
The Difference ◽  
New Evidence ◽  
Rating Downgrades

Prior research documents significant negative long-term stock returns following bond-rating downgrades. Some downgraded firms are placed on credit watches before downgrades, and we find that the post-downgrade stock underperformance of such firms is significantly reduced. We explore two explanations for the difference in post-downgrade stock performance that are not mutually exclusive: (a) a credit watch placement provides an early signal of the subsequent rating downgrade and gives investors more time to better understand the information content of the downgrade (the early-disclosure effect), and (b) a credit watch placement induces better recovery from credit deterioration for the downgraded firm in the long run (the recovery effect). We find that firms receiving watch-preceded downgrades show better improvements in operating profitability, financial leverage, and overall default risk, and are less likely to be further downgraded in future periods, compared with firms that are directly downgraded. Our findings suggest that the recovery effect is important in explaining downgraded firms’ performance in the long run and provide new evidence in support of the premise in the recent literature that credit watches can induce on-watch firms’ efforts to restore deteriorated credit quality.

Mortgage default risk: New evidence from internet search queries

2016 ◽  
Vol 96 ◽  
pp. 91-111 ◽  
Author(s):  
Marcelle Chauvet ◽  
Stuart Gabriel ◽  
Chandler Lutz
Keyword(s):  
Default Risk ◽  
Mortgage Default ◽  
Internet Search ◽  
Search Queries ◽  
New Evidence
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