This paper argues that the reduced-form jump diffusion model may not be appropriate for credit risk modeling. To correctly value hybrid defaultable financial instruments, e.g., convertible bonds, we present a new framework that relies on the probability distribution of a default jump rather than...

This paper presents a new model for valuing hybrid defaultable financial instruments, such as, convertible bonds. In contrast to previous studies, the model relies on the probability distribution of a default jump rather than the default jump itself, as the default jump is usually inaccessible....

The main objective of this study is to determine a lease agreement to finance an investment project and a solution for managing credit risk. This study investigates three types of contingent leases to reduce the costs associated with bankruptcy and compensate for the lessor's position. A leasing...

Under an incomplete market, we develop a utility-based pricing model for equity and contingent convertible bond (CCB) while the straight bond is priced by an equilibrium pricing method. We derive the semi-closed-form solutions of the utility-based prices of equity and CCB and the explicit...

This study estimates the parameters of credit derivatives, equity derivatives and structural models for bank recapitalisation in Nigeria by employing contingent convertibles (CoCos) and using the Nigeria Treasury Bill rate for 2009 as the risk-free rate, estimated recapitalisation requirements...

This is the first study on the risk-neutral distribution of option returns. We derive solutions for the risk-neutral variance, skewness, and kurtosis of call and put option returns and document several properties of these ex-ante moments. We find that the volatility, skewness, and kurtosis of...

In this work we incorporate recovery risk into Merton's original credit risk model by introducing a separate risk driver for the recovery process and rationalize this new model within a "partial information" perspective. We show that while adding the recovery risk driver has no impact on...

The value premium is the empirical observation that low market/book “value” stocks have higher returns than high market/book “growth” stocks. In this paper, we investigate and present evidence for an “equity as a call option hypothesis” for the value premium. Volatility decreases the...

This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some...

This paper considers exponential utility indifference pricing for a multidimensional non-traded assets model subject to intertemporal default risk, and provides a semigroup approximation for the utility indifference price. The key tool is the splitting method, whose convergence is proved based...