Firm value, diversified capital assets, and credit risk: towards a theory of default correlation

DOI zum Zitieren der Version auf EPub Bayreuth: https://doi.org/10.15495/EPub_UBT_00005551
URN to cite this document: urn:nbn:de:bvb:703-epub-5551-7

Title data

Grüne, Lars ; Semmler, Willi ; Bernard, Lucas:
Firm value, diversified capital assets, and credit risk: towards a theory of default correlation.
Bayreuth , 2007

	Format: PDF Name: gruene_et_al_comp_jcr_2007.pdf Version: Published Version Available under License Creative Commons BY 4.0: Attribution
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Abstract

Following the lead of Merton (1974), recent research has focused on the relationship of credit risk to firm value. Although this has usually been done for a single firm, the growth of structured finance, which necessarily involves the correlation between included securities, has spurred interest in the connection between credit-default risk and the dependencies and cross-correlations arising in families of firms. Previous work by Grüne and Semmler (2005), focusing on a single firm, has shown that firm value models, incorporating company-specific endogenous risk premia, imply that exposure to risk does impact asset value. In this paper, we extend these results to study the effects of random shocks to diversied capital assets wherein the shocks are correlated to varying degrees. Thus, we construct a framework within which the effects of correlated shocks to capital assets can be related to the probability of default for the company. The dynamic decision problem of maximizing the present value of a firm faced with stochastic shocks is solved using numerical techniques. Further, the impact of varying dependency structures on the over-all default rate is also explored.

Further data

Item Type:	Preprint, postprint
Additional notes (visible to public):	Erscheint in: Journal of Credit Risk. Bd. 3 (2007) Heft 4 . - S. 81-109; https://doi.org/10.21314/JCR.2007.053
DDC Subjects:	500 Science 500 Science > 510 Mathematics
Institutions of the University:	Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics) > Chair Mathematics V (Applied Mathematics) - Univ.-Prof. Dr. Lars Grüne Faculties Faculties > Faculty of Mathematics, Physics und Computer Science Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics)
Language:	English
Originates at UBT:	Yes
URN:	urn:nbn:de:bvb:703-epub-5551-7
Date Deposited:	19 May 2021 06:56
Last Modified:	15 Jun 2021 08:40
URI:	https://epub.uni-bayreuth.de/id/eprint/5551

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