Credit risk pricing with both expected and unexpected default

Marco Realdon

Applied Financial Economics Letters, 2007, vol. 3, issue 4, 225-230

Abstract: This article presents a tractable structural model in which default may be both expected or unexpected. The model can predict realistically high short-term credit spreads. Closed form solutions are provided for corporate bonds and default swaps. The analysis suggests that, in order for the observed short-term yield spreads on high grade corporate debt to be compensation for credit risk, the market must believe that unexpected default may occur at any time, even if it is extremely unlikely, and that it may cause a dramatic sudden ‘downfall’ in the firm's assets value.

Date: 2007
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/17446540600993837 (text/html)
Access to full text is restricted to subscribers.

Related works:
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:taf:raflxx:v:3:y:2007:i:4:p:225-230

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/rafl20

DOI: 10.1080/17446540600993837

Access Statistics for this article

Applied Financial Economics Letters is currently edited by Anita Phillips

More articles in Applied Financial Economics Letters from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().