Pricing of Defaultable Bond
Date Issued
2004
Date
2004
Author(s)
Chiu, Chiao-Hsein
DOI
zh-TW
Abstract
Jarrow, Lando & Turnbull (1997) is the fundamental framework employed in this article to consider the bond pricing problem incorporating credit rating, and represents default process as finite states Markov chain. We adjusted the assumption in JLT that recovery rate is constant when a company goes bankruptcy and default process is only related to credit rating. Model 1 assumes that recovery rate can be affected by different default grade and other variable, and transition matrix can be affected by other variables. Model 2 assumes that recovery rate and default probability can be influenced by macro-economy situation, and we use simple linear regression to demonstrate the relationship between macro-economy situation and default probability. In empirical studies, we use the U.S. corporations in COMPUSTATE data base, which’s long term credit rating is below BBB, Z-score measure less than 1.81, debt-to-equity larger than 1, current ratio less 0.8 as targets to study how do macro-economy affect solvency. Solvency indicator can be represented as current ratio, quick ratio and debt-to-equity, and assume that when macro-economy situation becomes better can make solvency improved and debt-to-equity lowered.
We did an analysis of default probability of investment-grade bond during 1990 to 2003 also, and we found there is obvious negative correlation between macro-economy situation and default probability. The result shows the booming helps lowering the default probability investment-grade bond. Moreover, recovery rate and macro-economy indicator has obvious positive correlation too. Therefore, the result of adding macro-economy indicator as a factor in estimation of default probability and recovery rate can really make the pricing result be closer to the real result observed in market than JLT model.
It is hard to find data of transition matrix and recovery rate in Taiwan market, so we calculate transition matrix ourselves by the TCRI credit rating in TEJ database from 1999 to 2003, including one, two, three, four and five years transition matrix, and trace back the recovery rate by the observed bond price and pricing formula. Nevertheless, the estimation term structure of transition matrix is not long enough, we can’t consider the macro-economy situation completely, so only used JLT model trying to calculate corporate bond price in Taiwan in the end.
Subjects
信用評等
債券評價
景氣循環
馬可夫模型
信用風險
JLT
Bond Pricing
Markov Model
Credit Rating
Credit Risk
Type
thesis
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