A Structural Model with Unobserved Default Boundary

Thorsten Schmidt and Alexander Novikov

Applied Mathematical Finance, 2008, vol. 15, issue 2, 183-203

Abstract: A firm-value model similar to the one proposed by Black and Cox (1976) is considered. Instead of assuming a constant and known default boundary, the default boundary is an unobserved stochastic process. This process has a Brownian component, reflecting the influence of uncertain effects on the precise timing of the default, and a jump component, which relates to abrupt changes in the policy of the company, exogenous events or changes in the debt structure. Interestingly, this setup admits a default intensity, so the reduced form methodology can be applied.

Keywords: Structural model; equity default swaps; default boundary; jump-diffusion (search for similar items in EconPapers)
Date: 2008
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DOI: 10.1080/13504860701718281

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