A structural model of corporate bond pricing with co-ordination failure

Max Bruche

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: It has been suggested (Morris, Shin 2001) that co-ordination failure between bondholders could produce an effect that would explain the systematic mispricing of corporate debt produced by the Merton (1974) framework. In essence, fear of premature foreclosure by other debtors can lead to pre-emptive action, lowering the value of debt. This paper presents a continuous-time bond pricing model integrating this effect, and shows that co-ordination failure can indeed cause bonds to be traded at a discount.

JEL-codes: G30 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2002-03-01
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Citations: View citations in EconPapers (2)

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