Deriving Recovery Rate and Default Point：Reconciliation of Structural and Intensity Models

• Main Authors: Yao-Jun Huang, 黃耀軍
• Other Authors: Paul Hsueh
• Format: Others
• Language: en_US
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/49308100983099263245

碩士 === 國立中正大學 === 財務金融所 === 94 === This paper introduces a new methodology that integrates information in equity market, bond market, and financial statements to derive a unique recovery rate for every company by reconciling structural models with intensity models. We model a firm’s equity as the down-and-out call option and the expected loss of creditors as the down-and-out binary put option. Under the equilibrium between structural models with intensity models, the default probabilities derived from the two models are identical. Besides, we numerically obtain the expected recovery rates for the companies of concern. And the default points surprisingly consist with empirical findings as well. The main goal of this paper is to find out the equilibrium between structural models and intensity models in order to derive primary parameters numerically for pricing credit derivatives. We also apply our method to create a credit indicator that is used to predict default possibilities for companies. Consequently, it exhibits outstanding performance to our surprise.