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The Mills Ratio and the behavior of redeemable bond prices in the Gaussian structural model of corporate default |
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| Institution: | 1. New Economic School, Nakhimovsky Pr., 47, office 1721(3), Moscow 117418, Russia;2. Barclays Capital, Four Winds Plaza, Bolshaya Gruzinskaya Street 71, Moscow 123056, Russia;3. University of Sydney Business School and CIREQ, Sydney NSW 2006, Australia;4. St.Petersburg State University, St.Petersburg 199034, Russia;1. University of Hagen, Department of Economics, Universitaetsstrasse 41, 58097 Hagen, Germany;2. University of Hannover, School of Economics and Management, Koenigsworther Platz 1, 30167 Hannover, Germany |
| Abstract: | This paper shows that forward default intensities in the Black and Cox (1976) model of corporate default can be expressed in terms of the Mills Ratio (Mills, 1926). The behaviour of the forward default intensity and hence the survivorship functions then follows from inequalities that are satisfied by this ratio. This allows me to analyze the effect of the firm’s distance to default, growth rate and volatility upon the value of its debt. These results can be used to analyze the comparative static properties of other models of corporate default and perhaps other first passage time models. |
| Keywords: | Bankruptcy Corporate bond pricing First passage time Mills Ratio inequalities Comparative statics |
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