A Two-Factor Hazard Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads

Dilip Madan and Haluk Unal

Journal of Financial and Quantitative Analysis, 2000, vol. 35, issue 1, 43-65

Abstract: This paper proposes a two-factor hazard rate model, in closd form, to price risky debt. The likelihood of default is captured by the firm's non-interest sensitive assets and default-free interest rates. The distinguishing features of the model are threefold. First, the impact of capital structure changes on credit spreads can be analyzed. Second, the model allows stochastic interest rates to impact current asset values as well as their evolution. Finally, the proposed model is in closed fom, enabling us to undertake comparative statics analysis, compute parameter deltas of the model, calibrate empirical credit spreads, and determine hedge positions. Credit spreads generated by our model are consistent with empirical observations.

Date: 2000
References: Add references at CitEc
Citations: View citations in EconPapers (47)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
Working Paper: A Two-Factor Hazard-Rate Model for Pricing Risky Debt and the Term Structure of Credit Spreads (1999)
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: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:35:y:2000:i:01:p:43-65_00

Access Statistics for this article

More articles in Journal of Financial and Quantitative Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().