Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy

Viral V. Acharya () and Jennifer Carpenter

No 3328, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This Paper analyses corporate bond valuation and optimal call and default rules when interest rates and firm value are stochastic. It then uses the results to explain the dynamics of hedging. Bankruptcy rules are important determinants of corporate bond sensitivity to interest rates and firm value. Although endogenous and exogenous bankruptcy models can be calibrated to produce the same prices, they can have very different hedging implications. We show that empirical results on the relation between corporate spreads and Treasury rates provide evidence on duration and find that the endogenous model explains the empirical patterns better than typical exogenous models.

Keywords: call; corporate bonds; default; duration; endogenous bankruptcy; hedging; optimal exercise boundary; stochastic interest rates (search for similar items in EconPapers)
JEL-codes: G12 G13 G31 G33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
Date: 2002-04
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP3328.asp (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Corporate Bond Valuation and Hedging with Stochastic Interest Rates and Endogenous Bankruptcy (2002)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cpr:ceprdp:3328

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP3328.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().