Structural Models of Credit Risk are Useful:Evidence from Hedge Ratio on Corporate Bonds

• Main Authors: Ya-Ting Hsu, 許雅婷
• Other Authors: Yu-Chen Tu
• Format: Others
• Language: zh-TW
• Published: 2009
• Online Access: http://ndltd.ncl.edu.tw/handle/6n8n6j

碩士 === 銘傳大學 === 財務金融學系碩士班 === 97 === It is well known that structural models of credit risk provide poor predictions of bond prices. We show that, despite this, they provide quite accurate predictions of the sensitivity of corporate bond returns to changes in the return of equity (hedge ratio). The data cover the period from July 2004 to December 2007. In this paper, we apply cross-section regression and Markov Chain Monte Carlo to investigate the usefulness of Merton model. The main result of this paper is that even the simplest of the structural models (Merton, 1974) produces hedge ratios that are not rejected in cross-sectional tests. Exclude risk factors, we also find corporate bond returns are influenced by other non-risk factors. The empirical results shows: (1) We can explain the usefulness of Merton model by hedge ratio. (2) Corporate bond returns are related to a number of non-risk factors such as the excess return on the 10-year constant maturity U.S Treasury bond and the slope of the term structure (the difference between the yield on ten-year and two-year constant-maturity U.S Treasury bonds).