Corporate credit risk prediction under stochastic volatility and jumps

Bu, Di & Liao, Yin (2014) Corporate credit risk prediction under stochastic volatility and jumps. Journal of Economic Dynamics and Control, 47, pp. 263-281.

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Abstract

This paper examines the impact of allowing for stochastic volatility and jumps (SVJ) in a structural model on corporate credit risk prediction. The results from a simulation study verify the better performance of the SVJ model compared with the commonly used Merton model, and three sources are provided to explain the superiority. The empirical analysis on two real samples further ascertains the importance of recognizing the stochastic volatility and jumps by showing that the SVJ model decreases bias in spread prediction from the Merton model, and better explains the time variation in actual CDS spreads. The improvements are found particularly apparent in small firms or when the market is turbulent such as the recent financial crisis.

Impact and interest:

1 citations in Scopus
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2 citations in Web of Science®

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ID Code: 77848
Item Type: Journal Article
Refereed: Yes
Keywords: Credit risk, CDS spread, Merton model, Stochastic volatility, Jumps
DOI: 10.1016/j.jedc.2014.08.006
ISSN: 0165-1889
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300) > Time-Series Analysis (140305)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Copyright Owner: Copyright 2014 Elsevier B.V.
Copyright Statement: NOTICE: this is the author’s version of a work that was accepted for publication in Journal of Economic Dynamics and Control. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Economic Dynamics and Control, Volume 47, (October 2014), DOI: 10.1016/j.jedc.2014.08.006
Deposited On: 19 Oct 2014 22:21
Last Modified: 23 Oct 2014 16:33

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