Modelling default risk with occupation times

R. Makarov, A. Metzler and Z. Ni

Finance Research Letters, 2015, vol. 13, issue C, 54-65

Abstract: This paper develops a semi-analytic pricing formula, easily implemented via quadrature, for a structural model based on occupation times that contains both the Merton and Black–Cox models as limiting cases. In the model liquidation is triggered as soon as the firm’s asset value has spent a prespecified amount of time below the default barrier. Surprisingly, we find that the value of the firm’s debt (i) need not be monotone in the length of the grace period and (ii) need not lie between the limiting Merton and Black–Cox values.

Keywords: Occupation time; Credit risk; Merton model; Black–Cox model; Structural models (search for similar items in EconPapers)
JEL-codes: G12 G13 G19 G33 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:13:y:2015:i:c:p:54-65

DOI: 10.1016/j.frl.2015.03.003

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