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| Author: | Chu, Q. C. Lin, Y.-Y. |
| Title: | Determinants of the Dollar Value of Default Risk: A Put Option Perspective |
| Journal: | Review of Quantitative Finance and Accounting
2001 : MAR, VOL. 16:2, p. 131-148 |
| Index terms: | FINANCE DEFAULTS PUT OPTIONS BOND RATINGS |
| Language: | eng |
| Abstract: | The dollar value of default risk (DVDR) is measured by subtracting the observed trading price of a risky corporate bond from a Cox-Ingersoll-Ross model value of a corresponding pseudo-default-free bond. From an option pricing perspective, DVDR can be modeled as the value of a put option on the firm's risky assets. The DVDR of an individual investment-grade corporate bond is hypothesized to be related to the bond rating, time to maturity of the bond, size of the issuing firm, volatility of firm value, and dividend yield of the issuing firm. In the case of the first four factors, the empirical results are consistent with the predictions from a put option perspective. |
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