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A structural model of corporate bond pricing with co-ordination failure

By Max Bruche

Abstract

It has been suggested (Morris, Shin 2001) that co-ordination failure between bondholders could produce an effect that would explain the systematic mispricing of corporate debt produced by the Merton (1974) framework. In essence, fear of premature foreclosure by other debtors can lead to pre-emptive action, lowering the value of debt. This paper presents a continuous-time bond pricing model integrating this effect, and shows that co-ordination failure can indeed cause bonds to be traded at a discount

Topics: HF Commerce, HB Economic Theory
Publisher: Financial Markets Group, London School of Economics and Political Science
Year: 2002
OAI identifier: oai:eprints.lse.ac.uk:24930
Provided by: LSE Research Online

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