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Hedging interest rate risk using a structural model of credit risk
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Titel: | Hedging interest rate risk using a structural model of credit risk/ Jing-Zhi Huang, Zhan Shi |
Format: | E-Book |
Sprache: | Englisch |
veröffentlicht: |
[Columbus, Ohio]
Charles A. Dice Center for Research in Financial Economics
February, 2016
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Gesamtaufnahme: |
Ohio State University: Fisher College of Business working paper series ; WP 2016, 4
Ohio State University: Fisher College of Business working paper series ; WP 2016-03-04 |
Schlagwörter: | |
Quelle: | Verbunddaten SWB Lizenzfreie Online-Ressourcen |
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520 | |a This paper investigates predictions of structural credit risk models for interest rate sensitivities of corporate bond returns. Recent evidence has shown that the existing models fail to capture this sensitivity (a stylized fact referred to as the interest rate sensitivity puzzle). We propose and estimate a structural model that incorporates a three-factor dynamic term structure model (DTSM) into the Merton (1974) model. We show that the proposed model captures the sensitivity of corporate bond returns to the entire yield curve, thereby providing a solution to the puzzle. In addition, hedging effectiveness substantially improves under the proposed model. Our results indicate that to better capture and hedge the interest rate exposure of corporate bond returns, we need to incorporate a more realistic DTSM in the existing structural models. Lastly, we find that frictions in the corporate bond and equity markets as well as time-varying volatility constitute major impediments to further improvement in hedging effectiveness | ||
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author | Huang, Jing-Zhi, Shi, Zhan |
author_facet | Huang, Jing-Zhi, Shi, Zhan |
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author_sort | Huang, Jing-Zhi |
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contents | This paper investigates predictions of structural credit risk models for interest rate sensitivities of corporate bond returns. Recent evidence has shown that the existing models fail to capture this sensitivity (a stylized fact referred to as the interest rate sensitivity puzzle). We propose and estimate a structural model that incorporates a three-factor dynamic term structure model (DTSM) into the Merton (1974) model. We show that the proposed model captures the sensitivity of corporate bond returns to the entire yield curve, thereby providing a solution to the puzzle. In addition, hedging effectiveness substantially improves under the proposed model. Our results indicate that to better capture and hedge the interest rate exposure of corporate bond returns, we need to incorporate a more realistic DTSM in the existing structural models. Lastly, we find that frictions in the corporate bond and equity markets as well as time-varying volatility constitute major impediments to further improvement in hedging effectiveness |
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illustrated | Not Illustrated |
imprint | [Columbus, Ohio], Charles A. Dice Center for Research in Financial Economics, February, 2016 |
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physical | 1 Online-Ressource (circa 53 Seiten); Illustrationen |
publishDate | February, 2016 |
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publisher | Charles A. Dice Center for Research in Financial Economics |
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spelling | Huang, Jing-Zhi VerfasserIn (DE-588)171528964 (DE-627)061739308 (DE-576)13231634X aut, Hedging interest rate risk using a structural model of credit risk Jing-Zhi Huang, Zhan Shi, [Columbus, Ohio] Charles A. Dice Center for Research in Financial Economics February, 2016, 1 Online-Ressource (circa 53 Seiten) Illustrationen, Text txt rdacontent, Computermedien c rdamedia, Online-Ressource cr rdacarrier, Working papers series / Charles A. Dice Center for Research in Financial Economics WP 2016, 4, Fisher College of Business working paper series WP 2016-03-04, This paper investigates predictions of structural credit risk models for interest rate sensitivities of corporate bond returns. Recent evidence has shown that the existing models fail to capture this sensitivity (a stylized fact referred to as the interest rate sensitivity puzzle). We propose and estimate a structural model that incorporates a three-factor dynamic term structure model (DTSM) into the Merton (1974) model. We show that the proposed model captures the sensitivity of corporate bond returns to the entire yield curve, thereby providing a solution to the puzzle. In addition, hedging effectiveness substantially improves under the proposed model. Our results indicate that to better capture and hedge the interest rate exposure of corporate bond returns, we need to incorporate a more realistic DTSM in the existing structural models. Lastly, we find that frictions in the corporate bond and equity markets as well as time-varying volatility constitute major impediments to further improvement in hedging effectiveness, (DE-206)34 Graue Literatur DE-206, Shi, Zhan VerfasserIn (DE-588)1047834685 (DE-627)779290682 (DE-576)401659844 aut, Ohio State University Fisher College of Business Fisher College of Business working paper series WP 2016, 4 2016,0040 (DE-627)488012465 (DE-576)281277184 (DE-600)2189279-9 ns, Ohio State University Fisher College of Business Fisher College of Business working paper series WP 2016-03-04 2016003004 (DE-627)559428006 (DE-576)281379912 (DE-600)2412551-9 ns, https://dx.doi.org/10.2139/ssrn.2730829 Resolving-System kostenfrei Volltext, https://ssrn.com/abstract=2730829 X:ELVSSRN Verlag kostenfrei, https://doi.org/10.2139/ssrn.2730829 X:ELVSSRN Resolving-System kostenfrei, https://dx.doi.org/10.2139/ssrn.2730829 LFER, LFER epn:3497697680 2019-07-22T00:00:00Z |
spellingShingle | Huang, Jing-Zhi, Shi, Zhan, Hedging interest rate risk using a structural model of credit risk, Ohio State University, Fisher College of Business, Fisher College of Business working paper series, WP 2016, 4, Ohio State University, Fisher College of Business, Fisher College of Business working paper series, WP 2016-03-04, This paper investigates predictions of structural credit risk models for interest rate sensitivities of corporate bond returns. Recent evidence has shown that the existing models fail to capture this sensitivity (a stylized fact referred to as the interest rate sensitivity puzzle). We propose and estimate a structural model that incorporates a three-factor dynamic term structure model (DTSM) into the Merton (1974) model. We show that the proposed model captures the sensitivity of corporate bond returns to the entire yield curve, thereby providing a solution to the puzzle. In addition, hedging effectiveness substantially improves under the proposed model. Our results indicate that to better capture and hedge the interest rate exposure of corporate bond returns, we need to incorporate a more realistic DTSM in the existing structural models. Lastly, we find that frictions in the corporate bond and equity markets as well as time-varying volatility constitute major impediments to further improvement in hedging effectiveness, Graue Literatur |
title | Hedging interest rate risk using a structural model of credit risk |
title_auth | Hedging interest rate risk using a structural model of credit risk |
title_full | Hedging interest rate risk using a structural model of credit risk Jing-Zhi Huang, Zhan Shi |
title_fullStr | Hedging interest rate risk using a structural model of credit risk Jing-Zhi Huang, Zhan Shi |
title_full_unstemmed | Hedging interest rate risk using a structural model of credit risk Jing-Zhi Huang, Zhan Shi |
title_in_hierarchy | WP 2016, 4. Hedging interest rate risk using a structural model of credit risk (February, 2016), WP 2016-03-04. Hedging interest rate risk using a structural model of credit risk (February, 2016) |
title_short | Hedging interest rate risk using a structural model of credit risk |
title_sort | hedging interest rate risk using a structural model of credit risk |
title_unstemmed | Hedging interest rate risk using a structural model of credit risk |
topic | Graue Literatur |
topic_facet | Graue Literatur |
url | https://dx.doi.org/10.2139/ssrn.2730829, https://ssrn.com/abstract=2730829, https://doi.org/10.2139/ssrn.2730829 |
work_keys_str_mv | AT huangjingzhi hedginginterestrateriskusingastructuralmodelofcreditrisk, AT shizhan hedginginterestrateriskusingastructuralmodelofcreditrisk |