A Study on Generalized Credit Risk Model---A Framework of Option Pricing Model with Stochastic Debt
Date Issued
2006
Date
2006
Author(s)
Chu, Tsan-Chang
DOI
en-US
Abstract
This is the first study on proposing a framework for corporate credit risk based on stochastic and path-dependent barrier options. The main contribution of this study is deducing a more realistic estimate for corporate default probability by releasing two assumptions made by the standard call option model. Two important factors ignored by the standard call option model are the possibility of default before debt maturity and the stochastic process of debt. Actually, a firm may go bankruptcy at any point in time before debt matures, and its debt value should follow a stochastic process such as the Geometric Brownian motion. If assets value falls below debt value at any time before maturity, corporate equity should be knocked out by bankruptcy.
The sensitivity analysis presents rational results about how variables affect default probabilities. In addition to the sensitivity analysis, we use empirical data from the COMPUSTAT and CRSP databases to compute the default probabilities of inactive firms, and our model provides a more realistic alternative for estimating a firm’s risk of default.
Subjects
隨機負債
向下觸及失效買權
障礙選擇權
信用風險
破產機率
倒帳機率
Stochastic Debt
Down-and-out Call Options
Barrier Options
Credit Risk
Default Probability
Type
thesis
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