Pricing corporate bonds with dynamic default barriers

1 Pricing Corporate Bonds with Risk Adjustable Default Barrier

This paper develops a corporate bond valuation model that incorporates a default barrier with dynamics depending on stochastic interest rates and variance of the corporate bond function. The volatility of the firm value affects the level of the barrier over time through the variance of the corporate bond function and its contribution to the barrier's dynamics is adjusted by a free parameter. We...

Pricing Emerging Market Corporate Bonds

Is Default Event Risk Priced in Corporate Bonds?

We identify and estimate the sources of risk that cause corporate bonds to earn an excess return over default-free bonds. In particular, we estimate the risk premium associated with a default event. Default is modelled using a jump process with stochastic intensity. For a large set of firms, we model the default intensity of each firm as a function of common and firm-specific factors. In the mo...

Pricing the Risk of Default: Are Bonds Enough?

This paper implements a reduced form credit default swap (CDS) pricing model. Theoretical prices found are compared with market prices to evaluate the goodness of fit. Theoretical prices and pricing errors are inspected by rating classes, sectors of economic activity and currency denomination of CDS. Pricing errors are analyzed through panel data estimation techniques, to find determinants of p...

Pricing Callable Bonds with Stochastic Interest Rate and Stochastic Default Risk: a 3d Finite Difference Model

This paper presents a 3D model for pricing defaultable bonds with embedded call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is...