Eventi del

24 2014 12:30 - 14:00
Via Roentgen 1, II floor, room 2 e4 sr 03

The Empirical Merton Model

Pietro Veronesi, University of Chicago Booth School of Business

joint with Christopher Culp (John Hopkins Institute for Applied Economics) and Yoshio Nozawa (Federal Reserve Board)

Abstract:
The main insight of the Merton model is that corporate debt is equal to risk-free debt minus a put option on the firm. While the Merton model notoriously fails to match the empirical properties of traded corporate bonds, its insight proves surprisingly robust in the data: A portfolio of risk-free debt minus traded options (“pseudo-bonds”) closely match the properties of traded corporate bonds. Pseudo-bonds display a credit spread puzzle, both in yields and returns, which is stronger at short maturities and cannot be explained by standard risk factors. Our methodology provides a novel model-free benchmark for bond valuation and
a laboratory for data-based counterfactual experiments on corporate debt.