publication . Preprint . 2005

Estimating the Probabilities of Default for Callable Bonds: A Duffie-Singleton Approach

David Wang;
Open Access
  • Published: 22 Jun 2005
This paper presents a model for estimating the default risks implicit in the prices of callable corporate bonds. The model considers three essential ingredients in the pricing of callable corporate bonds: stochastic interest rate, default risk, and call provision. The stochastic interest rate is modeled as a square-root diffusion process. The default risk is modeled as a constant spread, with the magnitude of this spread impacting the probability of a Poisson process governing the arrival of the default event. The call provision is modeled as a constraint on the value of the bond in the finite difference scheme. The empirical results are encouraging. First, the ...
free text keywords: Default Risk; Callable Bond, jel:G
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