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| Author: | Moraux, F. |
| Title: | Modeling the business risk of financially weakened firms: A new approach for corporate bond pricing |
| Journal: | International Review of Financial Analysis
2004 : VOL. 13:1, p. 47-61 |
| Index terms: | Risk Companies Bonds Pricing Models |
| Language: | eng |
| 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. |
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