An empirical analysis of structural models of corporate debt pricing
Titel:
An empirical analysis of structural models of corporate debt pricing
Auteur:
Teixeira, Joao C. A.
Verschenen in:
Applied financial economics
Paginering:
Jaargang 17 (2007) nr. 14 pagina's 1141-1165
Jaar:
2007-10
Inhoud:
This article tests empirically the performance of three structural models of corporate bond pricing, namely Merton (1974), Leland (1994) and Fan and Sundaresan (2000). While the first two models overestimate bond prices, the Fan and Sundaresan model exhibits an impressively good performance. When considering the prediction of credit spreads, the three models underestimate market spreads but, again, Fan and Sundaresan performs better. We find rating, maturity and asset volatility effects in the prediction power, as the models underestimate less the spreads of riskier firms and of bonds with better rating quality and longer maturity. Moreover, our results reveal the existence of a new industry effect. Spread errors are systematically related to some bond- and firm-specific variables, as well as term structure variables.
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