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Estimating Structural Models of Corporate Bond Prices in Indonesian Corporations

Indonesian Capital Market Review

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Field Value
 
Title Estimating Structural Models of Corporate Bond Prices in Indonesian Corporations
 
Creator Lenny Suardi; Department of Management, Faculty of Economics, Universitas Indonesia
M. Syamsudin; Faculty of Mathematics and Natural Sciences, Bandung Institute of Technology
 
Subject Capital Market
 
Description This  paper  applies  the  maximum  likelihood  (ML)  approaches  to  implementing  the structural  model  of  corporate  bond,  as  suggested  by  Li  and  Wong  (2008),  in  Indonesian corporations.  Two  structural  models,  extended  Merton  and  Longstaff  &  Schwartz  (LS) models,  are  used  in  determining  these  prices,  yields,  yield  spreads  and  probabilities  of default. ML estimation is used to determine the volatility of irm value. Since irm value is unobserved variable, Duan (1994) suggested that the irst step of ML estimation is to derive the likelihood function for equity as the option on the irm value. The second step is to ind parameters such as the drift and volatility of irm value, that maximizing this function. The irm value itself is extracted by equating the pricing formula to the observed equity prices. Equity,  total  liabilities,  bond  prices  data  and  the  irm's  parameters  (irm  value,  volatility of irm value, and default barrier) are substituted to extended Merton and LS bond pricing formula in order to valuate the corporate bond.These models are implemented to a sample of 24 bond prices in Indonesian corporation during  period  of  2001-2005,  based  on  criteria  of  Eom,  Helwege  and  Huang  (2004).  The equity  and  bond  prices  data  were  obtained  from  Indonesia  Stock  Exchange  for  irms  that issued equity and provided regular inancial statement within this period. The result shows that both models, in average, underestimate the bond prices and overestimate the yields and yield spread. activate javascript
 
Publisher Management Research Center, Department of Management, Faculty of Economics and Business, U
 
Contributor —
 
Date 2014-08-26
 
Type Peer-reviewed Article
 
Format application/mbox
 
Identifier http://journal.ui.ac.id/index.php/icmr/article/view/3662
 
Source Indonesian Capital Market Review; Vol 2, No 2 (2010): July 2010
 
Language en