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Dynamical analysis of corporate bonds based on the yield spread term-quality surface

Dynamical analysis of corporate bonds based on the yield spread term-quality surface Our aim of this research is to propose a model which estimates implied relative credit reliability from the yield spread of defaultable bonds and evaluates their spread risk. We introduce “yield spread term-quality surface” (YSTQS) which is defined on the space of duration and credit reliability of the issuers, and express their yield spread. First, we review the general pricing theorem of defaultable bonds with unpredictable recovery in the no-arbitrage context based on the external hazard rates. Second, we show that the dynamics of state variables determine the shape of the YSTQS, and they drive the YSTQS if the loss-adjusted hazard rates are described by a function of them. Finally, we show an empirical analysis of our model with daily yield spread, duration, and the credit ratings of corporate bonds. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asia-Pacific Financial Markets Springer Journals

Dynamical analysis of corporate bonds based on the yield spread term-quality surface

Shouda, Tomoaki
Asia-Pacific Financial Markets , Volume 12 (4) – Dec 19, 2006
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26 pages

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Publisher
Springer Journals
Copyright
Copyright © 2006 by Springer Science+Business Media, LLC
Subject
Finance; Finance, general; Macroeconomics/Monetary Economics//Financial Economics; International Economics; Econometrics; Economic Theory/Quantitative Economics/Mathematical Methods
ISSN
1387-2834
eISSN
1573-6946
DOI
10.1007/s10690-006-9028-3
Publisher site
See Article on Publisher Site

Abstract

Our aim of this research is to propose a model which estimates implied relative credit reliability from the yield spread of defaultable bonds and evaluates their spread risk. We introduce “yield spread term-quality surface” (YSTQS) which is defined on the space of duration and credit reliability of the issuers, and express their yield spread. First, we review the general pricing theorem of defaultable bonds with unpredictable recovery in the no-arbitrage context based on the external hazard rates. Second, we show that the dynamics of state variables determine the shape of the YSTQS, and they drive the YSTQS if the loss-adjusted hazard rates are described by a function of them. Finally, we show an empirical analysis of our model with daily yield spread, duration, and the credit ratings of corporate bonds.

Journal

Asia-Pacific Financial Markets – Springer Journals

Published: Dec 19, 2006

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