Bayesian Analysis of Structural Credit Risk Models with Microstructure Noises

Shirley J. Huang and Jun Yu
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Shirley J. Huang: Singapore Management University

Finance Working Papers from East Asian Bureau of Economic Research

Abstract: In this paper a Markov chain Monte Carlo (MCMC) technique is developed for the Bayesian analysis of structural credit risk models with microstructure noises. The technique is based on the general Bayesian approach with posterior computations performed by Gibbs sampling. Simulations from the Markov chain, whose stationary distribution converges to the posterior distribution, enable exact finite sample inferences of model parameters. The exact inferences can easily be extended to latent state variables and any nonlinear transformation of state variables and parameters, facilitating practical credit risk applications. In addition, the comparison of alternative models can be based on devian information criterion (DIC) which is straightforwardly obtained from the MCMC output. The method is implemented on the basic structural credit risk model with pure microstructure noises and some more general specifications using daily equity data from US and emerging markets. We find empirical evidence that microstructure noises are positively correlated with the firm values in emerging markets.

Keywords: MCMC; Credit risk; Microstructure noise; Devian information criterion (search for similar items in EconPapers)
JEL-codes: C22 G15 (search for similar items in EconPapers)
Date: 2009-01
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Related works:
Journal Article: Bayesian analysis of structural credit risk models with microstructure noises (2010)
Working Paper: Bayesian Analysis of Structural Credit Risk Models with Microstructure Noises
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