A Model for Pricing Stocks and Bonds with Default Risk

Topics:
Credit Management
Tags:
Bond,
Pricing Strategy,
Pricing,
Marketing Research,
Marketing,
Investment,
Financial Planning,
Finance,
Dividend,
Social Science Electronic Publishing Inc.
Source:
Social Science Electronic Publishing

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Overview: This paper develops a tractable, dynamic, no-arbitrage model for the pricing of bonds and stocks that are subject to default risk. The model produces the bond pricing equations of the Duffie and Singleton (1999) framework. It is then shown that a particular choice of dividend process, characterized by affine dividend yields, along with the Duffie and Singleton (1999) default specification, produces stock prices that are exponential affine in the model's state variables. Importantly, the model allows for quite general interdependence between the prices of risky debt and equity. This, along with the model's tractability, makes it a natural platform for empirical investigations into the pricing of a firm's capital structure.

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Format: HTML | Date: May 2002 | Pages: 1

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