A comparative study of structural models of corporate bond yields: An exploratory investigation

This paper empirically compares a variety of ®rm-value-based models of contingent claims. We formulate a general model which nests versions of the models introduced by Merton (1974), Leland (1994), Anderson and Sundaresan (1996), and Mella-Barral and Perraudin (1997). We estimate these using aggregate time series data for the US corporate bond market, monthly, from August 1970 through December 1996. We ®nd that models ®t reasonably well, indicating that variations of leverage and asset volatility account for much of the time-series variations of observed corporate yields. The performance of the recently developed models which incorporate endogenous bankruptcy barriers is somewhat superior to the original Merton model. We ®nd that the models produce default probabilties which are in line with the historical experience reported by Moodys. Ó 2000 Elsevier Science B.V. All rights reserved. Journal of Banking & Finance 24 (2000) 255±269 www.elsevier.com/locate/econbase q An earlier version of this paper was presented at the Financial Markets Summer Symposium in Gerzensee, Switzerland, July 1998, and at the Bank of England/ CEPR conference on Default Risk held in London, September 1998. We appreciate comments from participants of these seminars and particularly E. Altman, S. Hodges, and W. Perraudin. Responsibility for all views expressed and all errors is our own. * Corresponding author. Tel.: +32-10-473-981; fax: +32-10-473-945. E-mail address: [email protected] (R. Anderson). 1 IRES, Universit e Catholique de Louvain. This paper initiated while visiting the Department of Finance, Hong Kong University of Science and Technology. This paper has been partially supported by a Belgian government grant under the Pôles d'Attraction Inter-universitaire Program. 0378-4266/00/$ see front matter Ó 2000 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 4 2 6 6 ( 9 9 ) 0 0 0 5 9 X JEL classi®cation: G3; C51; G33