Credit risk: The case of First Interstate Bankcorp

Christine A. Brown; Sally Wang

doi:10.1016/S1057-5219(02)00076-5

Credit risk: The case of First Interstate Bankcorp

Christine A. Brown, Sally Wang

Research output: Contribution to journal › Article › Research › peer-review

2 Citations (Scopus)

Abstract

Structural models for pricing credit risk can be used to forecast the spread on risky bonds and for hedging credit risk. This article examines the forecasting accuracy of the Black-Scholes-Merton (BSM) model of risky debt using a data set consisting of weekly bond data for First Interstate Bancorp over the period January 1986-August 1993. In addition, structural model hedge parameters and credit spread options are tested for their effectiveness in hedging the increasing credit risk premium on First Interstate Bancorp debt. Credit spread options in combination with a duration hedge offer the best hedging strategy, reducing the standard deviation of the hedging error by a minimum of 84%.

Original language	English
Pages (from-to)	229-248
Number of pages	20
Journal	International Review of Financial Analysis
Volume	11
Issue number	2
DOIs	https://doi.org/10.1016/S1057-5219(02)00076-5
Publication status	Published - 17 Jul 2002

Keywords

Credit risk
Credit spread option
Duration hedge
Risk management

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10.1016/S1057-5219(02)00076-5

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abstract = "Structural models for pricing credit risk can be used to forecast the spread on risky bonds and for hedging credit risk. This article examines the forecasting accuracy of the Black-Scholes-Merton (BSM) model of risky debt using a data set consisting of weekly bond data for First Interstate Bancorp over the period January 1986-August 1993. In addition, structural model hedge parameters and credit spread options are tested for their effectiveness in hedging the increasing credit risk premium on First Interstate Bancorp debt. Credit spread options in combination with a duration hedge offer the best hedging strategy, reducing the standard deviation of the hedging error by a minimum of 84%.",

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Credit risk: The case of First Interstate Bankcorp

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Keywords

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