The Mills Ratio and the behavior of redeemable bond prices in the Gaussian structural model of corporate default

Peter Spencer

Finance Research Letters, 2014, vol. 11, issue 1, 8-15

Abstract: This paper shows that forward default intensities in the Black and Cox (1976) model of corporate default can be expressed in terms of the Mills Ratio (Mills, 1926). The behaviour of the forward default intensity and hence the survivorship functions then follows from inequalities that are satisfied by this ratio. This allows me to analyze the effect of the firm’s distance to default, growth rate and volatility upon the value of its debt. These results can be used to analyze the comparative static properties of other models of corporate default and perhaps other first passage time models.

Keywords: Bankruptcy; Corporate bond pricing; First passage time; Mills Ratio inequalities; Comparative statics (search for similar items in EconPapers)
JEL-codes: G12 G13 G31 G33 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:1:p:8-15

DOI: 10.1016/j.frl.2013.05.006

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