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

by Binh Dao of the UniversitÚ Paris Dauphine, and
Monique Jeanblanc of the UniversitÚ d'╔vry

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.

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