A Comparative Study of Structural Models of Corporate Bond Yields: An Exploratory Investigation

Ronald Anderson and Suresh Sundaresan
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Ronald Anderson: UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES); CEPR
Suresh Sundaresan: Columbia University, Graduate School of Business

No 1999009, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: This paper empirically compares a variety of firm-value-based models of contingent claims. We formulate a general model which takes the perpetual coupon bond models of Merton (1974), Leland (1994) and Anderson, Sundaresan and Tychon (1996), as well as some immediate generalizations thereof, as special cases. We estimate these using aggregate time series data for the US corporate bond market, monthly, from August 1970 through December 1996. The data are average yields for industrial corporate bonds rated BBB, Treasury yields, leverage measures derived from the Flow of Funds Accounts, interest coverage measures derived from the National Income Accounts, and volatility measures derived from the stock market. In the basic specification with constant default free rates, we find that models with endogenous bankruptcy barriers (the Leland and the Anderson, Sundaresan and Tychon models) fit quite well. Thus, in these models, variations of leverage and asset volatility are found to account for much of the time-series variations of observed corporate yields. We then use the estimates to calculate the implied probability of default within N years. We find under plausible assumptions on the market risk-premium for levered firms that the models produce default probabilities for 5 years or more which are in line with the historical experience reported by Moodys.

Keywords: Contingent Claims Analysis; Corporate Bonds; Credit Risk (search for similar items in EconPapers)
JEL-codes: G12 G13 G33 (search for similar items in EconPapers)
Pages: 32
Date: 1998-07-01, Revised 1999-01
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:1999009

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