This study provides a rigorous empirical comparison of structural and reduced-form credit risk frameworks. The literature differentiates between structural models that are based on modeling of the evolution of the balance sheet of the issuer, and reduced-form models that specify credit risk...

This paper examines the effect of debt and liquidity on corporate investment in a continuous-time framework. We show that stockholder-bondholder agency conflicts cause investment thresholds to be U-shaped in leverage and decreasing in liquidity. In the absence of tax effects, we derive the...

This paper develops a simple model for a leveraged firm and endogenizes the firm's bankruptcy point by assuming that equity issuance is costly. Equity-issuance costs reflect the difficulties in issuing new equity for firms that are close to financial distress. The resulting model captures...

This paper empirically studies the risk structure of interest rates for Deutschemark-denominated bonds. For this purpose, we estimate term structures of interest rates using the parsimonious fitting function of Nelson and Siegel (1987) for virtually risk free Government bonds and five different...

The literature on default-claim pricing falls into three categories. Building on the classical Merton model, the structural approach models the dynamics of the asset value and assumes that default is triggered when the equity value reaches an exogenous asset level. In a second class of...

In this paper, we propose a theoretical continuous-time model to analyze the impact of liquidity on bond prices. This model prices illiquid bonds relative to liquid bonds and provides a testable theory of illiquidity induced price discounts. The model is tested using 1992-1994 data from bonds...

In this paper we extend an analysis by Lo and Wang (1995), who showed that predictability of asset returns affects derivatives prices through its impact on instantaneous volatility. We investigate how the whole instantaneous variance-covariance matrix of two assets returns is affected by typical...

Credit default swaps (CDSs) are among the most successful financial innovations of recent years, which is reflected in the rapidly expanding market. CDS trading occurs in the over-the-counter market, which relies heavily on broker intermediation to arrange trades. We provide empirical evidence...

CO2 emission allowances are traded nowadays OTC and on exchanges across Europe. It thus becomes increasingly important for traders of these emission certificates to have a valid CO2 spot price model to value potential derivatives. In addition, CO2 emitting companies require an adequate CO2 spot...

Objective of this paper is to gain insights into jump occurrences and to enhance the understanding of modelling jumps in electricity markets. We provide a common modelling framework that allows to incorporate the main jump patterns observed in electricity spot prices and compare the...