Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5088680 | Journal of Banking & Finance | 2015 | 17 Pages |
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.
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Flavia Barsotti, Luca Del Viva,