Research of Credit and Liquidity Risks
Date Issued
2009
Date
2009
Author(s)
Chang, Jung-Hsien
Abstract
This thesis has two main articles. The first article uses a nonlinear filter as a way to simultaneously capture default and liquidity effects in the credit derivatives market. The second article uses liquidity spreads in the Treasury bond market to obtain a direct measure of the liquidity factor for corporate bond market, and estimate the liquidity component for corporate bond markets. In first article of this thesis, we propose a three-factor pricing model and investigate whether liquidity is an additional risk factor in determining credit derivatives pricing. Empirical results demonstrated that the introduction of a liquidity risk factor was important to mitigate pricing errors in credit derivatives prices. To discuss whether the information about the options market impacts the pricing of credit derivatives, we conducted further analysis of credit derivatives prices and options variables. Empirical results demonstrated that options variables could be useful in explaining credit derivatives prices. The second article uses liquidity spreads in the Treasury bond market to obtain a direct measure of the liquidity factor for corporate bond market, and estimate the liquidity component for corporate bond markets. To capture time variation on instantaneous spreads and volatility, and reduce modeling bias, semi-parametric techniques are applied to estimate the time varying intensity process. Empirical results demonstrate that the liquidity factor is an important determinant to credit spreads, and the semi-parametric model can simultaneously capture the time effect and reduce modeling bias. The findings of these two articles lead us to believe that the default risk factor can have an enormous effect on credit derivatives and bond prices, but a liquidity risk factor also plays an important role in explaining credit derivatives and bond prices.
Subjects
Default risk
Liquidity risk
Semi-parameter model
Nonlinear filter
Options-implied volatility
Options-open interest
Type
thesis
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