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The Journal of Fixed Income

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Primary Article

Contingent Claims Analysis Applied in Credit Risk Modeling

Anne M. Anderson, William Maxwell and Theodore M.. Barnhill
The Journal of Fixed Income Winter 2002, 12 (3) 24-31; DOI: https://doi.org/10.3905/jfi.2002.319331
Anne M. Anderson
A Ph.D. candidate in finance at the Eller College of Business and Public Administration at the University of Arizona in Tucson, AZ.
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  • For correspondence: annea@mail.bpa.arizona.edu
William Maxwell
An assistant professor of finance at the Eller College at the University of Arizona in Tucson, AZ.
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  • For correspondence: maxwell@eller.arizona.edu
Theodore M.. Barnhill Jr
A finance professor at the School of Business and Public Management at George Washington University in Washington, DC.
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  • For correspondence: barnhill@gwu.edu
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Abstract

A fundamental in credit risk analysis is estimation of the probability that fixed-income securities will migrate to different bond rating categories. Unlike historical transition probabilities, several contingent claims credit risk methodologies simulate the value of a firm's assets and/or debt ratio to create bond rating probability distributions. This study tests the validity of using empirically calculated debt ratios to assign bond ratings. The empirical tests provide evidence supporting the use of such methodologies, with some caveats. Debt ratios are industry-specific and time-dependent, so care must be taken in estimating model parameters from historical relationships.

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The Journal of Fixed Income
Vol. 12, Issue 3
Winter 2002
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Contingent Claims Analysis Applied in Credit Risk Modeling
Anne M. Anderson, William Maxwell, Theodore M.. Barnhill
The Journal of Fixed Income Dec 2002, 12 (3) 24-31; DOI: 10.3905/jfi.2002.319331

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Contingent Claims Analysis Applied in Credit Risk Modeling
Anne M. Anderson, William Maxwell, Theodore M.. Barnhill
The Journal of Fixed Income Dec 2002, 12 (3) 24-31; DOI: 10.3905/jfi.2002.319331
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