Estimating Structural Bond Pricing Models
Posted: 28 Feb 2004
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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: Suggested Citation