A down-and-out exchange option model with jumps to evaluate firms' default probabilities in Brazil

Claudio Henrique da Silveira Barbedo and Eduardo Facó Lemgruber

Emerging Markets Review, 2009, vol. 10, issue 3, 179-190

Abstract: We develop a tractable structural model to estimate a firm's default probability by modeling its asset and debt behavior. The model incorporates jump factors. For a set of Brazilian large corporations, we compare the structural model results to the default probabilities predicted by a survival analysis applied to the Central Bank debt information database. Our model outperforms other structural models. In a last step, we use a firm's sector failure probabilities to calibrate the model. This process is executed by adjusting the model jump volatility and it helps to explain the differences between debt and equity market failure probabilities.

Keywords: Default; probability; Equity; market; Debt; market; Option (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:10:y:2009:i:3:p:179-190

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