Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing

Franck Moraux ()

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Abstract: Most structural models of default risk assume that the firm's asset return is normally distributed, with a constant volatility. By contrast, this article details the properties that the process of assets should have in the case of financially weakened firms. It points out that jump-diffusion processes with time-varying volatility provide a refined and accurate perspective on the business risk dimension of default risk. Representative Arrow–Debreu state price densities (SPD) and term structures of credit spreads are then explored. The credit curves show that the business uncertainties play a major in the pricing of corporate liabilities.

Keywords: Business risk; Bond pricing; Credit spreads; Default risk; Jump risk (search for similar items in EconPapers)
Date: 2004-02-04
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Published in International Review of Financial Analysis, 2004, 13 (1), pp.47-61

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Journal Article: Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-00010138

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