Estimating Structural Bond Pricing Models

Posted: 28 Feb 2004

See all articles by Jan Ericsson

Jan Ericsson

McGill University; Swedish Institute for Financial Research (SIFR)

Joel Reneby

Stockholm School of Economics - Department of Finance

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Abstract

A difficulty which arises when implementing structural bond pricing models is the estimation of the value and risk of the firm's assets - neither of which is directly observable. We perform a simulation experiment in order to evaluate a maximum likelihood method applicable to this problem. Contrasting the performance of the maximum likelihood estimators to that of estimators traditionally used in academia and industry, we find strong support for the maximum likelihood approach. In fact, the inefficiency of the traditional estimator may help to explain the failure of past attempts to implement structural bond pricing models.

Keywords: Default risk, corporate bonds, credit spreads, maximum likelihood

JEL Classification: G12, G13, G33

Suggested Citation

Ericsson, Jan and Reneby, Joel, Estimating Structural Bond Pricing Models. Available at SSRN: https://ssrn.com/abstract=509302

Jan Ericsson (Contact Author)

McGill University ( email )

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Swedish Institute for Financial Research (SIFR)

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Joel Reneby

Stockholm School of Economics - Department of Finance ( email )

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Sweden
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+46 8 312327 (Fax)

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