Assessing Credit with Equity: A CEV Model with Jump to Default

L. Campi, S.Y. Polbennikov, A. Sbuelz

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Abstract

Unlike in structural and reduced-form models, we use equity as a liquid and observable primitive to analytically value corporate bonds and credit default swaps.Restrictive assumptions on the .rm.s capital structure are avoided.Default is parsimoniously represented by equity value hitting the zero barrier either diffusively or with a jump, which implies non-zero credit spreads for short maturities.Easy cross-asset hedging is enabled.By means of a tersely speci.ed pricing kernel, we also make analytic credit-risk management possible under systematic jump-to-default risk.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages32
Volume2005-27
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-27

Keywords

  • Equity
  • Corporate Bonds
  • Credit Default Swaps
  • Constant-Elasticity-of-Variance (CEV) Diffusion
  • Jump to Default

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    Campi, L., Polbennikov, S. Y., & Sbuelz, A. (2005). Assessing Credit with Equity: A CEV Model with Jump to Default. (CentER Discussion Paper; Vol. 2005-27). Finance.