n Investment Analysts Journal - Credit risk models in the South African context

Volume 2003, Issue 57
  • ISSN : 1029-3523
  • E-ISSN: 2077-0227
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We investigate and compare the application of the Merton model (1974) and the Shimko, Tejima, van Deventer model (1993) to the valuation of risky debt in the South African context. In the Merton model a flat term structure for the short-term interest rate is assumed. We then consider the effect of stochastic interest rates, specifically the Vasicek model, as applied to risky debt evaluation by Shimko et al. We use the credit spread as a basis for testing the two models against empirical data. Much improved credit spreads are obtained by the Shimko <I>et al.&lt;/I&gt; model.

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