Please use this identifier to cite or link to this item: http://hdl.handle.net/10397/29171
Title: A barrier option framework for corporate security valuation
Authors: Brockman, P
Turtle, HJ
Keywords: Bankruptcy prediction
Barrier option
Security valuation
Issue Date: 2003
Publisher: Elsevier
Source: Journal of financial economics, 2003, v. 67, no. 3, p. 511-529 How to cite?
Journal: Journal of financial economics 
Abstract: This paper proposes a framework for corporate security valuation based on path-dependent, barrier option models instead of the commonly used path-independent approach. We argue that path dependency is an intrinsic and fundamental characteristic of corporate securities because equity can be knocked out whenever a legally binding barrier is breached. A direct implication of this framework is that equity will be priced as a down-and-out call option. We provide empirical validation of the barrier model by showing that implied barriers are statistically and economically significant for a large cross-section of industrial firms. Additional robustness tests confirm that barriers remain significant over a wide range of input variable estimates. And finally, we apply the barrier option framework to bankruptcy prediction and find that implied failure probabilities dominate Z-scores in most cases.
URI: http://hdl.handle.net/10397/29171
ISSN: 0304-405X
DOI: 10.1016/S0304-405X(02)00260-X
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