Corporate credit risk prediction under stochastic volatility and jumps
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Description
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.
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ID Code: | 77848 | ||
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Item Type: | Contribution to Journal (Journal Article) | ||
Refereed: | Yes | ||
ORCID iD: |
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Measurements or Duration: | 19 pages | ||
Keywords: | CDS spread, Credit risk, Jumps, Merton model, Stochastic volatility | ||
DOI: | 10.1016/j.jedc.2014.08.006 | ||
ISSN: | 0165-1889 | ||
Pure ID: | 32729917 | ||
Divisions: | Past > QUT Faculties & Divisions > QUT Business School Current > Schools > School of Economics & Finance |
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Copyright Owner: | Consult author(s) regarding copyright matters | ||
Copyright Statement: | This work is covered by copyright. Unless the document is being made available under a Creative Commons Licence, you must assume that re-use is limited to personal use and that permission from the copyright owner must be obtained for all other uses. If the document is available under a Creative Commons License (or other specified license) then refer to the Licence for details of permitted re-use. It is a condition of access that users recognise and abide by the legal requirements associated with these rights. If you believe that this work infringes copyright please provide details by email to qut.copyright@qut.edu.au | ||
Deposited On: | 19 Oct 2014 22:21 | ||
Last Modified: | 21 Jul 2024 11:35 |
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