Bayesian corporate bond pricing and credit default swap premium models for deriving default probabilities and recovery rates

Tomohiro Ando

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

This paper develops a Bayesian method by jointly formulating a corporate bond (CB) pricing model and credit default swap (CDS) premium pricing models to estimate the term structure of default probabilities and the recovery rate. These parameters are formulated by incorporating firm characteristics such as industry, credit rating and Balance Sheet/Profit and Loss information. A cross-sectional model valuing all given CB prices and CDS premiums is considered. The quantities derived are regarded as what market participants infer in forming CB prices and CDS premiums. We also develop a statistical significance test procedure without any distributional assumptions for the specified model. An empirical analysis is conducted using Japanese CB and CDS market data.

Original languageEnglish
Pages (from-to)454-465
Number of pages12
JournalJournal of the Operational Research Society
Volume65
Issue number3
DOIs
Publication statusPublished - 2014 Mar

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Keywords

  • Bayesian econometrics
  • credit risk management
  • default probability
  • recovery rates

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Management Information Systems
  • Marketing
  • Strategy and Management

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