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Explaining Credit Ratings through a Perpetual-Debt Structural Model

Barone, Gaia (2021) Explaining Credit Ratings through a Perpetual-Debt Structural Model. Journal of Credit Risk, 17 (2). ISSN 1755-9723

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In this article we calibrate a Perpetual-Debt Structural Model (PDSM) by using Moody’s historical credit-ratings. In the PDSM, stocks are equivalent to a portfolio that contains a perpetual American option to default and bonds are perpetual securities whose face value plays the role of a “notional” capital used to calculate the amount of interests due in the unit of time.

The key question is whether PDSM can generate (real-world) default probabilities consistent with those historically estimated by Moody’s, under empirically reasonable parameter choices. The answer is ‘yes’. The paper also contains an application at the level of a single listed firm: Deutsche Bank. The PDSM risk indicators have been used to assign a credit rating consistent with Moody’s scale.

Item Type: Article
Subjects: H Social Sciences > HG Finance
H Social Sciences > HG Finance > Credit. Debt. Loans.
Divisions: School of Business > Staff Research and Publications
Depositing User: Dan English
Date Deposited: 01 Feb 2021 10:38
Last Modified: 29 Jul 2021 11:11

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