Dorfleitner, Gregor and Schneider, Paul and Veza, Tanja (2011) Flexing the default barrier. QUANTITATIVE FINANCE, 11 (12). pp. 1729-1743. ISSN 1469-7688,
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The paper introduces a Black-Cox-type structural model for credit default swaps (CDS). The existing literature on structural CDS pricing is extended by allowing a general functional form for the default barrier specified without reference to asset volatilities, dividend yields or interest rates. We develop a fast and robust algorithm to compute survival probabilities numerically. An empirical application suggests that the market-implied barrier is stable over time, with a possibly hump-shaped term structure. The implied barrier can be used for computing survival probabilities consistent with objective expectations of asset evolution, for pricing under counterparty risk, and for determining optimal corporate bond covenants.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | BOUNDARY CROSSING PROBABILITIES; BROWNIAN-MOTION; CAPITAL STRUCTURE; RATE DEBT; APPROXIMATIONS; OPTIONS; RATES; TIME; RISK; Credit default swap; Structural model; Default boundary; Green's function; Calibration |
| Subjects: | 300 Social sciences > 330 Economics |
| Divisions: | Business, Economics and Information Systems > Institut für Betriebswirtschaftslehre > Lehrstuhl für Finanzierung (Prof. Dr. Gregor Dorfleitner) |
| Depositing User: | Dr. Gernot Deinzer |
| Date Deposited: | 06 Jul 2020 04:48 |
| Last Modified: | 06 Jul 2020 04:48 |
| URI: | https://pred.uni-regensburg.de/id/eprint/21671 |
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