Three essays in the theory of credit risk

The dissertation entitled "Three Essays in the Theory of Credit Risk" consists of three articles on credit risk modeling within the traditional structural framework. In each of these three articles, we examine the modeling of default risk under the assumption that the asset value of the firm and the value of the firm's debt follow a particular set of stochastic processes.;In the first article, we reexamine the effects of jump risk in structural credit risk modeling. Previous research suggests that jump risk in the asset value process considerably affects the default risk modeled in the structural framework and, in particular, can explain the sizable short-term yield spreads that are typically present in traded credit-risky financial instruments. We investigate the plausibility of this result. We find that for plausible parameter values and relative to the standard pure diffusion case, jump risk modeled in the form of any process with stationary independent increments generally has less significant effects on the shape of the term structure of credit spreads and on the magnitude of credit spreads than previously suggested.;In the second article, we investigate the implications of time-variation of volatility on the term structure of credit spreads. We find that for reasonable parameter values, time-variation of volatility in the asset value process has important implications for the default behavior of firms, for the magnitude of credit spreads, for the shape of the term structure of credit spreads and for the volatility of credit spreads.;In the third article, we propose a multi-factor model of corporate bond prices that generalizes the existing structural model. Here, the term structure of credit spreads is a function of a set of observable variables, including the issuer's leverage ratio, the riskfree interest rate and other stochastic factors that proxy for the issuer's likelihood of default. We test the model using prices of Delta Airlines' bonds. The results of the empirical analysis support the proposed multi-factor extension of the existing structural model.