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Default risk in asset pricing

Author

Listed:
  • Mella-Baral, Pierre

    (London School of Economics)

  • Tychon, Pierre

    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES) ; Belgian National Fund for Scientific Research (FNRS))

Abstract
This paper provides an analytical solution for the impact of default risk on the valuation of realistically intricate claims on time dependent uncertain income streams. Its modular structure allows us to adjust the set of assumptions concerning the event of default to the specificity of the environment which surrounds the asset. The importance of such a flexibility is illustrated in the context of corporate debt, examining the simplest case of finite lived coupon paying corporate bonds with principal repayment at maturity. The magnitude of risk premia, as well as the term structure of credit spreads, are not surprisingly largely determined by the assumed default scenario.

Suggested Citation

  • Mella-Baral, Pierre & Tychon, Pierre, 1996. "Default risk in asset pricing," LIDAM Discussion Papers IRES 1996021, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    • Handle: RePEc:ctl:louvir:1996021
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    File URL: http://sites.uclouvain.be/econ/DP/IRES/9621.pdf
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    References listed on IDEAS

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    Cited by:

    1. Marco Realdon, "undated". "Convertible Subordinated Debt Valuation and "Conversion in Distress"," Discussion Papers 03/18, Department of Economics, University of York.
    2. Manzoni, Katiuscia, 2002. "Modeling credit spreads: An application to the sterling Eurobond market," International Review of Financial Analysis, Elsevier, vol. 11(2), pages 183-218.
    3. Aronovich, Selmo, 1999. "Country Risk Premium: Theoretical Determinants and Empirical Evidence for Latin American Countries," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 53(4), October.
    4. Marco Realdon, 2006. "Book Values and Market Values of Equity and Debt," Discussion Papers 06/11, Department of Economics, University of York.
    5. Marco Realdon, 2006. "Valuation of the Firm's Liabilities when Equity Holders are also Creditors," Discussion Papers 06/16, Department of Economics, University of York.
    6. Marco Realdon, "undated". "Corporate Bond Valuation with Both Expected and Unexpected Default," Discussion Papers 03/21, Department of Economics, University of York.

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    More about this item

    Keywords

    asset pricing; default risk; bankruptcy;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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