Journal ArticleDOI
Investigating the Role of Systematic and Firm‐Specific Factors in Default Risk: Lessons from Empirically Evaluating Credit Risk Models*
TLDR
In this paper, the authors propose and empirically investigate a family of credit risk models driven by a two-factor structure for the short interest rate and an additional factor for firm-specific distress.Abstract:
This paper proposes and empirically investigates a family of credit risk models driven by a two‐factor structure for the short interest rate and an additional factor for firm‐specific distress. The firm‐specific distress factors include leverage, book‐to‐market, profitability, equity‐volatility, and distance‐to‐default. Our estimation approach and performance yardsticks show that interest rate risk is of first‐order importance for explaining variations in single‐name defaultable bond yields. When applied to low‐grade bonds, a credit risk model that takes leverage into consideration reduces absolute yield mispricing by as much as 30%. A strategy relying on Treasury instruments is effective in dynamically hedging credit exposures.read more
Citations
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An Empirical Analysis of the Pricing of Collateralized Debt Obligations
TL;DR: The authors used the information in CDO prices to study market expectations about how corporate defaults cluster and proposed a three-factor portfolio credit model to explain virtually all of the time-series and cross-sectional variation in an extensive data set of CDX index tranche prices.
Journal ArticleDOI
Stock Options and Credit Default Swaps: A Joint Framework for Valuation and Estimation
Liuren Wu,Peter Carr +1 more
TL;DR: In this article, the authors propose a dynamic consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company, and derive tractable pricing solutions for stock options.
Journal ArticleDOI
Individual stock-option prices and credit spreads
TL;DR: In this paper, the authors introduce measures of volatility and jump risk based on individual stock options to explain credit spreads on corporate bonds and show that a large part of the time-series variation in credit spreads can be explained in this way.
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Linking corporate social responsibility to firm default risk
Wenbin Sun,Kexiu Cui +1 more
TL;DR: In this paper, the authors explored the relationship between CSR and firm risk factors and found that CSR has a strong effect on default risk reduction, and this relationship is stronger on firms in high dynamism environments than in low dynamism ones.
Journal ArticleDOI
Stock Options and Credit Default Swaps: A Joint Framework for Valuation and Estimation
Peter Carr,Liuren Wu +1 more
TL;DR: In this paper, the authors propose a dynamically consistent framework that allows joint valuation and estimation of stock options and credit default swaps written on the same reference company, based on a Cox process with a stochastic arrival rate.
References
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The Cross‐Section of Expected Stock Returns
Eugene F. Fama,Kenneth R. French +1 more
TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
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On the pricing of corporate debt: the risk structure of interest rates
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The Determinants of Capital Structure Choice
TL;DR: In this paper, the explanatory power of some of the recent theories of optimal capital structure is analyzed empirically and a factor-analytic technique is used to mitigate the measurement problems encountered when working with proxy variables.
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