On valuing corporate debt with the volatility of corporate assets evolving according to an Ornstein-Uhlenbeck process

Bakhodir Ergashev

Finance from EconWPA

Abstract: In this paper the problem of valuing corporate debt with possibility of default is considered. It is assumed that the volatility of the value of a firm's assets evolves according to an Ornstein-Uhlenbeck process and default occurs only if the value of corporate assets falls below an exogenously specified, time dependent barrier. In the case of a particular choice of default barrier the explicit formulas for the present value of a corporate debt, the total value of the firm, the value of equity, the expected default time and the variation of default time are derived.

Keywords: Coporate debt; Ornstein-Uhlenbeck process; default time (search for similar items in EconPapers)
JEL-codes: G33 G12 (search for similar items in EconPapers)
Date: 2002-06-24
Note: Type of Document - Tex/WordPerfect/Handwritten; prepared on La Tex; to print on HP/PostScript/Franciscan monk; pages: 11 ; figures: non. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.

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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0206002

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