Double Exponential Jump Diffusion Process: A Structural Model of Endogenous Default Barrier with Roll-over Debt Structure

DefaultRisk.com the web's biggest credit risk modeling resource.

Submit Your Paper

Post Your Résumé

For Recruiters

Today's Featured Book

The Handbook of Credit Portfolio Management
by Greg N. Gregoriou, Christian Hoppe, McGraw-Hill, September 22, 2008, Hardcover, 504 pages

Training Discounted for DefaultRisk.com visitors only:

The Mathematics of Credit Derivatives: The Essential Credit Modelling and Pricing Companion
by Philipp J. Schönbucher,
WBS Training, August 2003, DVD / Interactive CD-ROM

Sponsor:
Shop at Amazon.com and support DefaultRisk.com

Double Exponential Jump Diffusion Process: A Structural Model of Endogenous Default Barrier with Roll-over Debt Structure

by Binh Dao of the Université Paris Dauphine, and
Monique Jeanblanc of the Université d'Évry

March 9, 2006

Abstract: In this paper, we extend the framework of Leland (1994b) who proposed a structural model of roll-over debt structure in a Black-Scholes framework to the case of a double exponential jump diffusion process. We consider a trade-off model with firm's parameters as firm risk, risk free interest rate, payout rate as well as tax benefit of coupon payments, default costs, violation of the absolute priority rule and tax rebate. We obtain the equity, debt, firm and credit spreads values in closed form formulae. We analyze these values as functions of coupon, leverage and maturity.

JEL Classification: G12, G13, G33.

Keywords: Double Exponential Jumps, Structural Approach, Credit Spreads, "Rollover" Debt Structure.

Books Referenced in this Paper: (what is this?)