The Estimation of Default Risk with Market Data

Georges Hübner

Liege - Groupe d'Etude des Mathematiques du Management et de l'Economie from UNIVERSITE DE LIEGE, Faculte d'economie, de gestion et de sciences sociales, Groupe d'Etude des Mathematiques du Management et de l'Economie

Abstract: This paper presents a Gaussian reduced-form default risk model. The riskless rate follows a two-dimensional ARMA process. The mean-reverting default spread features a ratio involving the market value of the firm's assets. Under recurrent credit risk, bond prices are analytically derived. Using panels of Eurobond prices, the S&P and Moody's ratings look quite equivalent, and the fit improves as ratings fall. Although the market-to-book ratio looks like a good candidate state variable for the rest of the world except Japan, it does not bring additional information for the pricing of US corporate bonds.

Keywords: RISK; CREDIT; ESTIMATOR (search for similar items in EconPapers)
JEL-codes: C13 D81 G21 (search for similar items in EconPapers)
Pages: 27 pages
Date: 1998
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Persistent link: https://EconPapers.repec.org/RePEc:fth:gemame:9813

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