Cross-ownership as a structural explanation for over- and underestimation of default probability

@article{Karl2014CrossownershipAA,
  title={Cross-ownership as a structural explanation for over- and underestimation of default probability},
  author={S. Karl and T. Fischer},
  journal={Quantitative Finance},
  year={2014},
  volume={14},
  pages={1031 - 1046}
}
  • S. Karl, T. Fischer
  • Published 2014
  • Economics
  • Quantitative Finance
  • Based on the work of Suzuki, we consider a generalization of Merton’s asset valuation approach in which two firms are linked by cross-ownership of equity and liabilities. Suzuki’s results then provide no arbitrage prices of firm values, which are derivatives of exogenous asset values. In contrast to the Merton model, the assumption of lognormally distributed assets does not result in lognormally distributed firm values, which also affects the corresponding probabilities of default. In a… CONTINUE READING
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