A Structured Framework for the Pricing of
Corporate Securities
If you have read a
basic introduction to structural credit risk models, such as Bluhm, Overbeck and
Wagner (2002), this
book may be your next step. It reads like a Ph.D. thesis (there is no preface or
clarification, so who knows), but it is delightfully accessible. The book
reviews much of the recent literature on structural models. It identifies
current challenges, and it proposes some interesting solutions.
Specifically, the author proposes directly modeling
EBIT (earnings before interest and taxes) as an arithmetic Brownian motion
instead of directly modeling company value as a geometric Brownian motion. He
also employs a Kalman filter to calibrate the model to both equity and fixed
income instruments.
Generally, the math is not too technical. It
doesn't build ideas, one upon another. So, if you get stuck on a detail, skip it
and move on. The book is nice because it illustrates results with a numerical
examples and an empirical test of the model. This stuff is rare in the
literature.
Contents
1. Introduction
2. The corporate securities framework
3. ABM- and GBM-EBIT-models
4.
Numerical illustration of the ABM- and GBM-model
5. Empirical test of the EBIT-based credit risk model
6. Concluding remarks
A. Notes on the
equity option valuation
The author's ideas are useful contributions to the
evolving theory. Read the book for them, or read it for the wonderful discussion
of the state-of-the-art, or read it for the many references to the literature.
The writing is good and the insights plentiful. I recommend it. [November 28,
2006]
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