Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/171574
Authors: 
Gersbach, Hans
Surulescu, Nicolae
Year of Publication: 
2010
Series/Report no.: 
Economics Working Paper Series 10/131
Abstract: 
We consider a stochastic volatility model of the mean-reverting type to describe the evolution of a firm’s values instead of the classical approach by Merton with geometric Brownian motions. We develop an analytical expression for the default probability. Our simulation results indicate that the stochastic volatility model tends to predict higher default probabilities than the corresponding Merton model if a firm’s credit quality is not too low. Otherwise the stochastic volatility model predicts lower probabilities of default. The results may have implications for various financial applications.
Subjects: 
stochastic volatility
Merton model
default probabilities
rate of mean reversion
JEL: 
G13
G21
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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