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Firm value, diversified capital assets, and credit risk: towards a theory of default correlation

Title data

Grüne, Lars ; Semmler, Willi ; Bernard, Lucas:
Firm value, diversified capital assets, and credit risk: towards a theory of default correlation.
In: Journal of Credit Risk. Vol. 3 (2007) Issue 4 . - pp. 81-109.
ISSN 1755-9723
DOI: https://doi.org/10.21314/JCR.2007.053

Abstract in another language

Following the lead of Merton (1974), recent research has focused on the relationship of credit risk to firm value. Although this has usually been done for a single firm, the growth of structured finance, which necessarily involves the correlation between included securities, has spurred interest in the connection between credit-default risk and the dependencies and cross-correlations arising in families of firms. Previous work by Grüne and Semmler (2005), focusing on a single firm, has shown that firm value models, incorporating company-specific endogenous risk premia, imply that exposure to risk does impact asset value. In this paper, we extend these results to study the effects of random shocks to diversied capital assets wherein the shocks are correlated to varying degrees. Thus, we construct a framework within which the effects of correlated shocks to capital assets can be related to the probability of default for the company. The dynamic decision problem of maximizing the present value of a firm faced with stochastic shocks is solved using numerical techniques. Further, the impact of varying dependency structures on the over-all default rate is also explored.

Further data

Item Type: Article in a journal
Refereed: Yes
Institutions of the University: Faculties
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics)
Faculties > Faculty of Mathematics, Physics und Computer Science > Department of Mathematics > Chair Mathematics V (Applied Mathematics) > Chair Mathematics V (Applied Mathematics) - Univ.-Prof. Dr. Lars Grüne
Faculties > Faculty of Mathematics, Physics und Computer Science
Result of work at the UBT: Yes
DDC Subjects: 500 Science
500 Science > 510 Mathematics
Date Deposited: 04 Mar 2021 07:18
Last Modified: 23 Mar 2021 09:12
URI: https://eref.uni-bayreuth.de/id/eprint/63643