Performance and determinants of the Merton structural model: Evidence from hedging coefficients

Flavia Barsotti; L. Del Viva

doi:10.1016/j.jbankfin.2015.04.007

Performance and determinants of the Merton structural model: Evidence from hedging coefficients

Flavia Barsotti
, L. Del Viva^*

^*Autor corresponent d’aquest treball

Producció científica: Article en revista indexada › Article › Avaluat per experts

1 Citació (Scopus)

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We empirically test the effectiveness of the Merton (1974) model in measuring the sensitivity of corporate bond returns to changes in equity value. We study the main variables that affect the performance of the model and relax the assumption of normally distributed rates of return. Results show that less than 6% of the bonds have a hedge ratio within 10% from the model predicted value. Volatility, time to maturity, size, distress, liquidity and information quality are found to be significant determinants of the efficacy of the model.

Idioma original	Anglès
Pàgines (de-a)	95-111
Nombre de pàgines	17
Revista	Journal of Banking and Finance
Volum	58
DOIs	https://doi.org/10.1016/j.jbankfin.2015.04.007
Estat de la publicació	Publicada - 1 de set. 2015
Publicat externament	Sí

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@article{9f75edc1c06f46d1a0f8dd3cc310560a,

title = "Performance and determinants of the Merton structural model: Evidence from hedging coefficients",

abstract = "We empirically test the effectiveness of the Merton (1974) model in measuring the sensitivity of corporate bond returns to changes in equity value. We study the main variables that affect the performance of the model and relax the assumption of normally distributed rates of return. Results show that less than 6\% of the bonds have a hedge ratio within 10\% from the model predicted value. Volatility, time to maturity, size, distress, liquidity and information quality are found to be significant determinants of the efficacy of the model.",

keywords = "Corporate bond spreads, Credit risk, Distress, Hedge ratios, Normal Inverse Gaussian, Spread sensitivity, Variance Gamma",

author = "Flavia Barsotti and \{Del Viva\}, L.",

note = "Funding Information: We are grateful for comments and suggestions to Carlo Bianchi, Stephen Schaefer, Ilya Strebulaev, Lenos Trigeorgis, the participants of the EFMA 2012 annual meeting, the C.R.E.D.I.T. 2009 meeting in Venice, the 2010 International Risk Management Conference in Florence and the seminar participants at the ESADE Business School. For their financial support, Luca Del Viva would like to thank the Spanish Ministry of Education and Science (ECO2011–24928) and Banco Sabadell. Any error is only the authors{\textquoteright} responsibility. Publisher Copyright: {\textcopyright} 2015 Elsevier B.V..",

year = "2015",

month = sep,

day = "1",

doi = "10.1016/j.jbankfin.2015.04.007",

language = "English",

volume = "58",

pages = "95--111",

journal = "Journal of Banking and Finance",

issn = "0378-4266",

publisher = "Elsevier B.V.",

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TY - JOUR

T1 - Performance and determinants of the Merton structural model

T2 - Evidence from hedging coefficients

AU - Barsotti, Flavia

AU - Del Viva, L.

N1 - Funding Information: We are grateful for comments and suggestions to Carlo Bianchi, Stephen Schaefer, Ilya Strebulaev, Lenos Trigeorgis, the participants of the EFMA 2012 annual meeting, the C.R.E.D.I.T. 2009 meeting in Venice, the 2010 International Risk Management Conference in Florence and the seminar participants at the ESADE Business School. For their financial support, Luca Del Viva would like to thank the Spanish Ministry of Education and Science (ECO2011–24928) and Banco Sabadell. Any error is only the authors’ responsibility. Publisher Copyright: © 2015 Elsevier B.V..

PY - 2015/9/1

Y1 - 2015/9/1

N2 - We empirically test the effectiveness of the Merton (1974) model in measuring the sensitivity of corporate bond returns to changes in equity value. We study the main variables that affect the performance of the model and relax the assumption of normally distributed rates of return. Results show that less than 6% of the bonds have a hedge ratio within 10% from the model predicted value. Volatility, time to maturity, size, distress, liquidity and information quality are found to be significant determinants of the efficacy of the model.

AB - We empirically test the effectiveness of the Merton (1974) model in measuring the sensitivity of corporate bond returns to changes in equity value. We study the main variables that affect the performance of the model and relax the assumption of normally distributed rates of return. Results show that less than 6% of the bonds have a hedge ratio within 10% from the model predicted value. Volatility, time to maturity, size, distress, liquidity and information quality are found to be significant determinants of the efficacy of the model.

KW - Corporate bond spreads

KW - Credit risk

KW - Distress

KW - Hedge ratios

KW - Normal Inverse Gaussian

KW - Spread sensitivity

KW - Variance Gamma

UR - https://www.scopus.com/pages/publications/84930675474

U2 - 10.1016/j.jbankfin.2015.04.007

DO - 10.1016/j.jbankfin.2015.04.007

M3 - Article

AN - SCOPUS:84930675474

SN - 0378-4266

VL - 58

SP - 95

EP - 111

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

ER -

Performance and determinants of the Merton structural model: Evidence from hedging coefficients

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