Rethinking Valuation and Pricing Models

16

Discount Rates, Default Risk and Asset Pricing in a Regime Change Model

Pu Chen^∗ and Willi Semmler^∗∗

^∗The New School for Social Research, New York, and Center for Empirical Macroeconomics Bielefeld

^∗∗Dept of Economics, New School for Social Research, NY, USA

Chapter Outline

16.1 Introduction

16.2 Proxy for Discount Rates from a Regime Change Model

16.3 Leveraging, Risk Premia and Asset Prices using Brownian Motions

16.4 Discount Rates, Risk Premia and Asset Prices in a Dynamic Model

16.5 Results of the Numerical Study

16.5.1 Deterministic case: Debt and asset value

16.5.2 The Stochastic case: Probability of default and asset value

16.5.3 Implications for bond and equity premium

16.6 Conclusions

References

16.1 Introduction

In the United States, ...