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Replication of credit ratings by a Perpetual-Debt Structural Model

Barone, Gaia (2018) Replication of credit ratings by a Perpetual-Debt Structural Model. Bancaria, 74 (5). pp. 24-40.

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Abstract

In this paper, we outline the general lines of a structural model that is based on the Leland model (1994), but differs from its assumptions about the tax regime. In the revised model, which we call the Perpetual-Debt Structural Model (Pdsm), stocks are equivalent to a portfolio that contains a perpetual American option to default. The paper offers a first empirical test of the model. Essentially, the question is: Is the Pdsm sufficiently flexible to give default probabilities consistent with those historically estimated by Moody’s? The answer is positive. The paper contains also a simple firmlevel application.

Item Type: Article
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > Credit. Debt. Loans.
Divisions: School of Business > Staff Research and Publications
Depositing User: CAOIMHE NI MHAICIN
Date Deposited: 13 Sep 2018 10:32
Last Modified: 13 Sep 2018 10:32
URI: http://trap.ncirl.ie/id/eprint/3110

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