Journal of Credit Risk
ISSN:
1744-6619 (print)
1755-9723 (online)
Editor-in-chief: Linda Allen and Jens Hilscher

Need to know
- We examine credit derivative pricing with structural models.
- Corporate balance sheet dynamics are modelled with additional risk sources.
- Credit risk associated with stochastic time is explored to capture increased uncertainty of longer horizons.
Abstract
This study examines the pricing of credit derivatives using the structural modeling framework. These types of models are known to have problems with accurately valuing derivative securities. To address these problems, this study proposes incorporating additional sources of risk associated with balance sheet dynamics. Specifically, the study introduces the hypothesis of imperfect balance sheet information (as previously explored by Duffie and Lando), which produces a realistic channel for the short-horizon default risk. Moreover, a stochastic time allowing for jumps is incorporated to capture the increased uncertainty over longer horizons, which could be linked to upcoming news or legal issues. Overall, the study demonstrates how these modifications can enhance the predictive power of structural models and improve their usefulness in real-world applications.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net