A CB (corporate bond) pricing probabilities and recovery rates model for deriving default probabilities and recovery rates. (English) Zbl 1319.91151

Kariya, Takeaki

Jones, Galin (ed.) et al., Advances in modern statistical theory and applications. A Festschrift in honor of Morris L. Eaton. Beachwood, OH: IMS, Institute of Mathematical Statistics (ISBN 978-0-940600-84-3). Institute of Mathematical Statistics Collections 10, 138-157 (2013).

Summary: We formulate a corporate bond (CB) pricing model for deriving the term structure of default probabilities (TSDP) and the recovery rate (RR) for each pair of industry factor and credit rating grade, and these derived TSDP and RR are regarded as what investors imply in forming CB prices in the market at each time. A unique feature of this formulation is that the model allows each firm to run several business lines corresponding to some industry categories, which is typical in reality. In fact, treating all the cross-sectional CB prices simultaneously under a credit correlation structure at each time makes it possible to sort out the overlapping business lines of the firms which issued CBs and to extract the TSDPs for each pair of individual industry factor and rating grade together with the RRs. The result is applied to a valuation of CDS (credit default swap) and a loan portfolio management in banking business.
For the entire collection see [Zbl 1319.62004].

MSC:

91G40	Credit risk
91G70	Statistical methods; risk measures
91G10	Portfolio theory
91G50	Corporate finance (dividends, real options, etc.)

Keywords:

business portfolio; corporate bond model; credit default swap; credit risk management; government bond model; recovery rate; term structure of default probabilities