Corporate asset pricing models and debt contracts

Martin Dòzsa and Karel Janda

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: In the past decades financial markets rapidly gained on complexity due to an increased demand for risk diversification and hedging. A number of sophisticated instruments was developed that capture various aspects of price movements, correlations of assets, macro-economic developments, and other changes that might affect the future income generated by the considered securities. The pricing of these securities was not sufficiently accurate using the traditional asset pricing models. In the search for new methods two different approaches appeared. One stream of literature (called the reduced-form approach) focused on finding a purely mathematical way of asset pricing, without the effort of finding any economical intuition behind the models. In contrast, the other group of academics studied the firm and its evolution. These, so-called structural models have an intuitive connection to the underlying economics, and therefore they can be helpful in understanding the reasons of price movements. This work fits in the category of structural approaches.

Pages: 41 pages
Date: 2015-08
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2015-33

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