Credit Spreads , Optimal Capital Structure , and Implied Volatility with Endogenous Default and Jump Risk ∗

@inproceedings{Chen2005CreditS,
  title={Credit Spreads , Optimal Capital Structure , and Implied Volatility with Endogenous Default and Jump Risk ∗},
  author={Nan Chen and Steven Kou},
  year={2005}
}
We propose a two-sided jump model for credit risk by extending the Leland-Toft endogenous default model based on the geometric Brownian motion. The model shows that jump risk and endogenous default can have significant impacts on credit spreads, optimal capital structure, and implied volatility of equity options: (1) The jump and endogenous default can produce a variety of non-zero credit spreads, including upward, humped, and downward shapes; interesting enough, the model can even produce… CONTINUE READING