A comparative study of structural models of corporate bond yields: An exploratory investigation

This paper empirically compares a variety of firm-value-based models of con tingent claims. We formulate a general model which nests versions of the mo dels introduced by Merton (1974), Leland (1994), Anderson and Sundaresan (1 996), and Mella-Barral and Perraudin (1997). We estimate these using aggreg ate time series data for the US corporate bond market, monthly, from August 1970 through December 1996. We find that models fit reasonably well, indic ating that variations of leverage and asset volatility account for much of the time-series variations of observed corporate yields. The performance of the recently developed models which incorporate endogenous bankruptcy barr iers is somewhat superior to the original Merton model. We find that the mo dels produce default probabilties which are in line with the historical exp erience reported by Moodys. (C) 2000 Elsevier Science B.V. All rights reser ved. JEL classification: G3; C51; G33.