Forte, S. and Lovreta, L., 2012, "Endogenizing Exogenous Default Barrier Models: The MM Algorithm", Journal of Banking and Finance, forthcoming. Download this paper (SSRN)
Forte, S., 2011, "Calibrating Structural Models: A New Methodology Based on Stock and Credit Default Swap Data", Quantitative Finance, Vol. 11, Issue 12, 1745-1759. Download this paper (QF)
Forte, S. and Peña, J.I, 2011, "Debt Refinancing and Credit Risk", Spanish Review of Financial Economics, Vol. 9, Issue 1, 1-10. Download this paper (SSRN)
Forte, S. and Peña, J.I, 2009, "Credit Spreads: An Empirical Analysis on the Informational Content of Stocks, Bonds, and CDS", Journal of Banking and Finance, Vol. 33, Issue 11, 2013-2025. Download this paper (JBF)
Forte, S., 2009, "Capital Structure: Optimal Leverage and Maturity Choice in a Dynamic Model", Revista de Economía Financiera, No 18, 26-47. Download this paper (SSRN)
Working Papers
"Credit Risk Discovery in the Stock and Credit Default Swap Market: Who Leads, When, and Why?".2009. (with Lidija Lovreta).
In this paper, we analyze the dynamic relationship between CDS spreads and stock market implied credit spreads for a large international set of companies during the period 2002-2004. We document a time-varying behavior of credit risk discovery, with a slight and declining dominance of the stock market during the period considered. The probability of such stock market leadership – along with the strength of the relationship between stock and CDS markets – increases with the overall credit risk level. This result, however, is not inconsistent with the argument of insider trading in credit derivatives; we document a positive relationship between the frequency of severe credit downturns and the probability of the CDS market leading credit risk discovery.
"Implied Default Barrier in Credit Default Swap Premia". 2008. (with Francisco Alonso and José Manuel Marqués)
This paper applies the methodology developed by Forte (2008) to extract the implied default point in the premium on credit default swaps (CDS). As well as considering a more extensive international sample of corporations (96 US, European and Japanese companies) and a longer time interval (2001-2004), we make two significant contributions to the original methodology. First, we calibrate bankruptcy costs, allowing for the adjustment of the mean recovery rate of each sector to its historical average. Second, and drawing on the sample of default point indicators for each company-year obtained, we propose an econometric model for these indicators that excludes any reference to the credit derivatives market. With this model it is thus possible to estimate the default barrier resorting solely to the equity market. Compared with other alternatives for setting the default point in the absence of CDS (such as the optimal default point for shareholders, the default point in the Moody's-KMV model or the face value of the debt), the out-of-sample use of the econometric model significantly improves the capacity of the structural model proposed by Forte (2008) to differentiate between companies with an investment grade rating (CDS less than 150 bp) and those with a non-investment grade rating.
