Valuing defaultable bonds: an excursion time approach

Abstract: Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical threshold. In the excursion approach the duration of default, the time period from the financial distress announcement through its resolution, is explicitly modeled. In this contribution, we provide a review of the literature on excursion time models of credit risk. Moreover, we examine the effects on credit spreads structure of different specifications of the event that triggers default.

Keywords: Credit risk; structural models; excursion approach; default threshold; default probability. (search for similar items in EconPapers)
JEL-codes: C15 C63 G12 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-rmg
Date: 2005-11-28
Note: Type of Document - pdf; pages: 16
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