Contents

 

Introduction

Executive Chapter Summaries

 

CHAPTER 1
Estimating Default Probabilities Implicit in Equity Prices
Tibor Janosi, Robert Jarrow, and Yildiray Yildirim

 

Introduction

The Model Structure

Description of the Data

Estimation of the State Variable Process Parameters

Equity Return Estimation

Analysis of the Time Series Properties of the Parameters

Analysis of Fama–French Four-Factor Model with No Default

Analysis of a Bubble Component (P/E ratio) in Stock Prices

Analysis of the Default Intensity

Relative Performance of the Equity Return Models

Comparison of Default Intensities Based on Debt versus Equity

Conclusions

Notes

References

Appendix

 

CHAPTER 2
Predictions of Default Probabilities in Structural Models of Debt
Hayne E. Leland

 

Introduction

Recent Empirical Studies

Structural Models and Default Risk

The Default Boundary in Exogenous and Endogenous Cases

The Default Probability with Constant Default Barrier

Calibration of Models: The Base Case

Matching Empirical Default Frequencies with the L-T Model

Matching Empirical DPS with the L-S Model

The Moody's-KMV Approach

Some Preliminary Thoughts on the Relationship Between the KMV Approach and L-S/L-T

Conclusions

Acknowledgments

Postscript

Appendix

Notes

References

 

CHAPTER 3
Survey of the Recent Literature: Recovery Risk
Sanjiv R. Das

 

Introduction

Empirical Attributes

Recovery Conventions

Recovery in Structural Models

Recovery in Reduced-Form Models

Measure Transformations

Summary and Speculation

References

 

CHAPTER 4
Non-Parametric Analysis of Rating Transition and Default Data
Peter Fledelius, David Lando, and Jens Perch Nielsen

 

Introduction

Data and Outline of Methodology

Estimating Transition Intensities in Two Dimensions

One-Dimensional Hazards and Marginal Integration

Confidence Intervals

Transitions: Dependence on Previous Move and Duration

Multiplicative Intensities

Concluding Remarks

Acknowledgments

Notes

References

 

CHAPTER 5
Valuing High-Yield Bonds: A Business Modeling Approach
Thomas S. Y. Ho and Sang Bin Lee

 

Introduction

Specification of the Model

A Numerical Illustration

Empirical Evidence

Implications of the Model

Conclusions

Acknowledgments

Appendix

Notes

References

 

CHAPTER 6
Structural versus Reduced-Form Models: A New Information-Based Perspective
Robert A. Jarrow and Philip Protter

 

Introduction

The Setup

Structural Models

Reduced-Form Models

A Mathematical Overview

Observable Information Sets

Conclusion

Acknowledgment

Notes

References

 

CHAPTER 7
Reduced-Form versus Structural Models of Credit Risk: A Case Study of Three Models
Navneet Arora, Jeffrey R. Bohn, and Fanlin Zhu

 

Introduction

Merton, Vasicek-Kealhofer, and Hull-White Models

Data and Empirical Methodology

Results

Conclusion

Acknowledgments

Notes

References

 

CHAPTER 8
Implications of Correlated Default for Portfolio Allocation to Corporate Bonds
Mark B. Wise and Vineer Bhansali

 

Introduction

A Model for Default

The Portfolio Problem

Sample Portfolios with Zero Recovery Fractions

Sample Portfolios with Nonzero Recovery Fractions

Concluding Remarks

Acknowledgments

Notes

References

 

CHAPTER 9
Correlated Default Processes: A Criterion-Based Copula Approach
Sanjiv R. Das and Gary Geng

 

Introduction

Description of the Data

Copulas and Features of the Data

Determining the Joint Default Process

Simulating Correlated Defaults and Model Comparisons

Discussion

Acknowledgments

Appendix: The Skewed Double Exponential Distribution

Notes

References

 

Index