Scandinavian Working Papers in Economics

SIFR Research Report Series,
Institute for Financial Research

No 15: Valuing Corporate Liabilities

Jan Ericsson () and Joel Reneby ()
Additional contact information
Jan Ericsson: McGill University
Joel Reneby: Stockholm School of Economics

Abstract: We implement a structural bond pricing framework on a large panel of US industrial issues using an efficient maximum likelihood methodology. Although, like others before us, we underpredict yield spread levels when using only stock market data in the estimation, our errors are much less dispersed. In addition, we show that when our model underpredicts spreads, the errors are correlated with liquidity proxies, suggesting that an underestimation of total yield spreads may be economically plausible. When we include bond price information in our estimation, our errors become similar in magnitude to those found in recent implementations of reduced form models.

Keywords: Contingent claims; Structural models; Credit risk; Credit spreads; Liquidity premiums

JEL-codes: G12; G13

66 pages, June 15, 2003

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