An Econometric Analysis Of Fractional Models To Credit Risk Pricing

The authors propose a fractional version of two well-known credit risk pricing structural models: the Merton and Black and Cox models. The authors assume that the value of the firm obeys to a Geometric Fractional Brownian Motion. Prices for the equity, the bond and credit spreads are derived and a sensitivity analysis is performed. To provide a justification for these models, an empirical analysis is carried out, which employs two different datasets: Constant Maturity Yields and Moody's Long-Term for the period December 1992 - November 2003 Corporate Bond Yield Averages and Lehman Brothers Eurodollar Indices covering the period June 1996 - July 2006. Long memory properties of Treasury and corporate bond yields as well as credit spreads are thus investigated.