Credit risk: The case of First Interstate Bankcorp

Structural models for pricing credit risk can be used to forecast the spread on risky bonds and for hedging credit risk. This article examines the forecasting accuracy of the Black–Scholes–Merton (BSM) model of risky debt using a data set consisting of weekly bond data for First Interstate Bancorp o...

Ausführliche Beschreibung

Gespeichert in:
Bibliographische Detailangaben
Veröffentlicht in:International review of financial analysis 2002, Vol.11 (2), p.229-248
Hauptverfasser: Brown, Christine A., Wang, Sally
Format: Artikel
Sprache:eng
Schlagworte:
Online-Zugang:Volltext
Tags: Tag hinzufügen
Keine Tags, Fügen Sie den ersten Tag hinzu!
Beschreibung
Zusammenfassung:Structural models for pricing credit risk can be used to forecast the spread on risky bonds and for hedging credit risk. This article examines the forecasting accuracy of the Black–Scholes–Merton (BSM) model of risky debt using a data set consisting of weekly bond data for First Interstate Bancorp over the period January 1986–August 1993. In addition, structural model hedge parameters and credit spread options are tested for their effectiveness in hedging the increasing credit risk premium on First Interstate Bancorp debt. Credit spread options in combination with a duration hedge offer the best hedging strategy, reducing the standard deviation of the hedging error by a minimum of 84%.
ISSN:1057-5219
1873-8079
DOI:10.1016/S1057-5219(02)00076-5