Abstract
We propose a structural model with a joint process of tangible assets (marker) and firm status for the pricing of corporate securities. The firm status is assumed to be latent or unobservable, and default occurs when the firm status process reaches a default threshold at the first time. The marker process is observable and assumed to be correlated with the latent firm status. The recovery upon default is a fraction of tangible assets at the time of default. Our model can evaluate both the corporate debt and equity to fit their market prices in a unified framework. When the two processes are perfectly correlated, our model is reduced to the seminal Black–Cox model. Numerical examples are given to support the usefulness of our model.
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Kijima, M., Suzuki, T. & Tanaka, K. A latent process model for the pricing of corporate securities. Math Meth Oper Res 69, 439–455 (2009). https://doi.org/10.1007/s00186-008-0246-5
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DOI: https://doi.org/10.1007/s00186-008-0246-5