Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
We develop a reduced-form approach for valuing callable corporate bonds by characterizing the call probability via an intensity process. Asymmetric information and market frictions justify the existence of a call-arrival intensity from the market's perspective. Our approach both extends the reduced-form model of Duffie and Singleton (1999) for defaultable bonds to callable bonds and captures some important differences between call and default decisions. A comprehensive empirical analysis of callable bonds using both our model and the more traditional American option approach for valuing callable bonds shows that the reduced-form model fits callable bond prices well and that it outperforms the traditional approach both in- and out-of-sample.