Working Paper: A new approach to modelling banks' equity volatility: Adding time-to-maturity jumps
Working Papers - August 2017 - No. 118
Time-to-maturity is introduced alongside leverage and asset volatility to explain equity volatility. The time-to-maturity can be interpreted as investors' views on when the firm will be liquidated and thereby relates to their view on the funding and solvency situation of the bank. Results for large European banks indicate that changes to the perceived time-to-maturity can indeed partly explain changes in observed equity volatility.