Open access
Date
2010-07Type
- Working Paper
ETH Bibliography
yes
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Abstract
We consider a stochastic volatility model of the mean-reverting type to describe theevolution of a firm’s values instead of the classical approach by Merton with geometricBrownian motions. We develop an analytical expression for the default probability. Oursimulation results indicate that the stochastic volatility model tends to predict higherdefault probabilities than the corresponding Merton model if a firm’s credit quality isnot too low. Otherwise the stochastic volatility model predicts lower probabilities ofdefault. The results may have implications for various financial applications. Show more
Permanent link
https://doi.org/10.3929/ethz-a-006145085Publication status
publishedJournal / series
Economics Working Paper SeriesVolume
Publisher
ETH Zurich, Center of Economic Research (CER-ETH)Subject
Stochastic volatility; Merton model; Default probabilities; Rate of mean reversionOrganisational unit
02045 - Dep. Geistes-, Sozial- u. Staatswiss. / Dep. of Humanities, Social and Pol.Sc.
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ETH Bibliography
yes
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