A Study on the Accuracy of Risky Bond Yield Index
Date Issued
2008
Date
2008
Author(s)
Lin, Chao-Yuan
Abstract
This article provides a Markov process for the reduced form model to test the accuracy of the risky bond yield index gotten from TEJ (Taiwan Economic Journal) data base. The model is based on Jarrow and Turnbull (1995), with the bankruptcy process following a discrete state space Markov chain in credit ratings. The parameters of this model are easily estimated by observable data. For example, through calculating the probability of default, the risky bond price could be applied without evaluating the company’s asset. This article uses two kinds of data from TEJ data base. One is the credit rating change data of Taiwan Publicly traded companies in the past six years, and the other is risky bond yield index. Using these data in reduced form model, we get the theoretical risky bond yield index. To ompare the difference between actual and theoretical risky bond yield index, we discuss the probability of the misestimating. After the real diagnosis analysis, the actual risky bond yield index is found to be larger than theoretical index. Two master factors are predicted: First, the constraints from the hypothesis of model and data source and second, some economic factors.
Subjects
Markov process
Risky Bond Yield Index
credit rating
Type
thesis
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