A CB (corporate bond) pricing probabilities and recovery rates model for deriving default probabilities and recovery rates
AbstractIn this paper 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.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1206.4766.
Date of creation: Jun 2012
Date of revision: Jul 2012
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-01 (All new papers)
- NEP-BEC-2012-07-01 (Business Economics)
- NEP-RMG-2012-07-01 (Risk Management)
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- Pierre Collin-Dufresne, 2001. "On the Term Structure of Default Premia in the Swap and LIBOR Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 56(3), pages 1095-1115, 06.
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