Assessing Credit with Equity

A CEV Model with Jump to Default

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

Research output: Working paperDiscussion paperOther research output

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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

Fingerprint

Equity
CEV model
Credit
Jump
Maturity
Hedging
Corporate bonds
Credit risk management
Default risk
Credit spreads
Pricing kernel
Credit default swaps
Assets
Capital structure
Reduced-form model

Keywords

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

Cite this

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

Assessing Credit with Equity : A CEV Model with Jump to Default. / Campi, L.; Polbennikov, S.Y.; Sbuelz, A.

Tilburg : Finance, 2005. (CentER Discussion Paper; Vol. 2005-27).

Research output: Working paperDiscussion paperOther research output

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T1 - Assessing Credit with Equity

T2 - A CEV Model with Jump to Default

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AU - Polbennikov, S.Y.

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KW - Credit Default Swaps

KW - Constant-Elasticity-of-Variance (CEV) Diffusion

KW - Jump to Default

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Campi L, Polbennikov SY, Sbuelz A. Assessing Credit with Equity: A CEV Model with Jump to Default. Tilburg: Finance. 2005. (CentER Discussion Paper).