The effect of stock market and commodity prices on structural credit risk measures of oil companies

Abstract

This paper studied the extent the idiosyncrasies of some expected default probability (EDP) measures can be explained by the idiosyncrasies of the returns on market index, industry index and commodity prices. Standard & Poor’s 500 (S&P 500), Chicago Board Options Exchange (CBOE)’s OIX index and crude oil prices, OILBRNP, were selected as the market indicators. The Crude Petroleum and Natural Gas Extraction industry of SICCODE 1311 was studied in this paper, totaling to 178 companies. The credit models used were: Merton, Longstaff and Schwartz and Leland and Toft models. We found that, within the idiosyncrasies, the market and industry indices explained the Longstaff and Schwartz EDP measures better than the other measures. Furthermore, the commodity prices explained the Leland and Toft EDP measures better than the other measures. We construed that the EDP measures could be differentiated by the effects of market indices and commodity prices. We further suggested a structural explanation to this result.BUSINES