Young Ho Eom

Structural models of corporate bond pricing: An empirical analysis

This article empirically tests five structural models of corporate bond pricing: those of Merton (1974), Geske (1977), Longstaff and Schwartz (1995), Leland and Toft (1996), and Collin-Dufresne and Goldstein (2001). We implement the models using a sample of 182 bond prices from firms with simple capital structures during the period 1986–1997. The conventional wisdom is that structural models do not generate spreads as high as those seen in the bond market, and true to expectations, we find that the predicted spreads in our implementation of the Merton model are too low. However, most of the other structural models predict spreads that are too high on average. Nevertheless, accuracy is a problem, as the newer models tend to severely overstate the credit risk of firms with high leverage or volatility and yet suffer from a spread underprediction problem with safer bonds. The Leland and Toft model is an exception in that it overpredicts spreads on most bonds, particularly those with high coupons. More accurate structural models must avoid features that increase the credit risk on the riskier bonds while scarcely affecting the spreads of the safest bonds.

Transmission of Swap Spreads and Volatilities in the Japanese Swap Market

This is an investigation of the Japanese yen and U.S. dollar interest rate swap markets during 1990–2000. It examines spreads over comparable Treasury yields for different maturities and the transmission of shocks to swap spreads and volatilities from one market to the other. The correlations between yen and dollar interest swap spreads are low, indicating that the credit risk factor is country-specific. Changes in the dollar interest rate swap spreads “Granger-cause” changes in the spreads of yen interest rate swaps for the long (ten-year) maturities. Yen swap spreads are highly correlated with interest rate differentials between the two markets, which influence subsequent movements in yen swap spreads. Transmission of the volatility of swap spreads is strong from the dollar to the yen markets and relatively weak in the other direction. These and other results suggest that specific institutional aspects, such as illiquidity and market frictions, may have affected the yen interest swap market more than the dollar market.

The International Linkage of Interest Rate Swap Spreads: The Yen-Dollar Markets

One of the important innovations in financial markets in recent years has been the development of the interest rate swap markets. Recent estimates indicate that the notional outstanding amount of privately negotiated (over-the-counter) derivatives at the end of 1998 was over

Failure Prediction: Evidence From Korea

80 trillion, of which interest rate swaps accounted for over

No-Arbitrage Option Pricing: New Evidence on the Validity of the Martingale Property

50 trillion. Given the importance of the yen in international trade and finance, it is not surprising that yen interest rate swaps form a substantial proportion of this amount (about

Credit Risk and the Yen Interest Rate Swap Market

10 trillion), second only to dollar-denominated swaps (about

Coupon Effects and the Pricing of Japanese Government Bonds: An Empirical Analysis

14 trillion). 1