In this paper, we outline the general lines of a structural model that is based on the Leland model (1994), but differs from its assumptions about the tax regime. In the revised model, which we call the Perpetual-Debt Structural Model (PDSM), stocks are equivalent to a portfolio that contains a perpetual American option to default. This paper offers a first empirical test of the model. Essentially, the question is: “Is the PDSM sufficiently flexible to give default probabilities consistent with those historically estimated by Moody’s?”. As we will see, the answer is positive. The paper contains a simple firm-level application. The PDSM risk indicators have been used to define the “market rating” of Deutsche Bank.

Mimicking Credit Ratings by a Perpetual-Debt Structural Model / Barone, Gaia. - (2017).

Mimicking Credit Ratings by a Perpetual-Debt Structural Model

BARONE, GAIA
2017

Abstract

In this paper, we outline the general lines of a structural model that is based on the Leland model (1994), but differs from its assumptions about the tax regime. In the revised model, which we call the Perpetual-Debt Structural Model (PDSM), stocks are equivalent to a portfolio that contains a perpetual American option to default. This paper offers a first empirical test of the model. Essentially, the question is: “Is the PDSM sufficiently flexible to give default probabilities consistent with those historically estimated by Moody’s?”. As we will see, the answer is positive. The paper contains a simple firm-level application. The PDSM risk indicators have been used to define the “market rating” of Deutsche Bank.
Credit, banking, risk management
Mimicking Credit Ratings by a Perpetual-Debt Structural Model / Barone, Gaia. - (2017).
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/173265
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