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A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions

A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions AbstractWe develop a reduced-form valuation model for bonds with make-whole call provisions. Informed by the structural differences between callable bonds with fixed call prices and callable bonds with make-whole call provisions, we specify our reduced-form model so that the call spread depends inversely on the default intensity. Using a sample of make-whole callable bonds, we estimate the parameters of our model using the extended Kalman filter and compare the performance of our model with the performance of a well-known reduced-form model for fixed-price callable bonds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions

Park, Min; Clark, Steven P.
Applied Mathematical Finance , Volume 22 (6): 23 – Nov 2, 2015
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A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions

Abstract

AbstractWe develop a reduced-form valuation model for bonds with make-whole call provisions. Informed by the structural differences between callable bonds with fixed call prices and callable bonds with make-whole call provisions, we specify our reduced-form model so that the call spread depends inversely on the default intensity. Using a sample of make-whole callable bonds, we estimate the parameters of our model using the extended Kalman filter and compare the performance of our model with...
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Publisher
Taylor & Francis
Copyright
© 2015 Taylor & Francis
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/1350486X.2015.1095643
Publisher site
See Article on Publisher Site

Abstract

AbstractWe develop a reduced-form valuation model for bonds with make-whole call provisions. Informed by the structural differences between callable bonds with fixed call prices and callable bonds with make-whole call provisions, we specify our reduced-form model so that the call spread depends inversely on the default intensity. Using a sample of make-whole callable bonds, we estimate the parameters of our model using the extended Kalman filter and compare the performance of our model with the performance of a well-known reduced-form model for fixed-price callable bonds.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Nov 2, 2015

Keywords: Callable bonds; make-whole call provision; reduced-form model

References

  • The Life Cycle of Make-whole Call Provisions
  • Corporate Yield Spreads and Bond Liquidity
  • Multi-Factor Cox-Ingersoll-Ross Models of the Term Structure: Estimates and Tests from a Kalman Filter Model
  • Estimating Exponential Affine Term Structure Models by Kalman Filter
  • The Relation between Treasury Yields and Corporate Bond Yield Spreads
  • Estimating the Price of Default Risk
  • Transform Analysis and Asset Pricing for Affine Jump Diffusions
  • Modeling Term Structures of Defaultable Bonds
  • “Explaining the Rate Spread on Corporate Bonds
  • Reduced-Form Valuation of Callable Corporate Bonds: Theory and Evidence
  • Structural versus Reduced Form Models: A New Information Based Perspective
  • Changing Times: Accurate Solutions to Pricing and Conditional Moment Problems in Non-Affine Continuous-time Models
  • Indexing a Bond’s Call Price: An Analysis of Make-Whole Call Provisions
  • On the Pricing of Corporate Debt: The Risk Structure of Interest Rates
  • Make-Whole Call Provisions: A Case of ‘Much Ado about Nothing?’
  • What is the Cost of Financial Flexibility? Theory and Evidence for Make-Whole Call Provisions