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Corporate bond credit spreads Research

Author: ZhaoNa From: www.yourpaper.net Posted: 2009-03-31 00:41:04 Read:
Abstract: With the short-term financing bills market gradually grown, the credit risk of short-term financing bills might be interested in the financial markets have a certain negative impact. Credit spreads of corporate bonds will become one of the main factors determining the pricing of corporate bonds, including short-term financing bills the domestic credit spreads, however, still in its infancy. This paper summarized the the credit spreads studies of domestic and foreign bonds, systematic summary of bond credit spreads the connotation and influence factors analysis estimates of credit spreads and the fitting method, the pricing of credit spreads and credit spread term structure, in the hope the reasonable pricing of corporate bond research has played a catalytic role.
Keywords: term structure of credit spread corporate bond pricing model

Bonds is an important carrier of credit risk, credit spreads of bonds not only predict certain events of default and the probability of default, and of direct benefit to the pricing of credit risk management and credit products. The mid-1990s, China issued corporate bonds once occurred in the event of default. Although there are regulatory reasons, but also reflects China between corporate bonds and government bonds there is a certain amount of credit spreads. The occurrence of the Asian financial crisis in 1997 had led to the Italian government bonds relative to the rise in German bond credit spreads and volatility. Of credit spreads can not only early warning businesses credit rating changes, but also conducive to the relevant investors, businesses and countries foresee an event of default may occur timely use of risk-free assets and bonds to hedge. With the gradual expansion of Chinese enterprises short-term financing bonds issued market, the credit risk of short-term financing bills market will have a greater negative impact on the development of the entire market. Credit spreads of corporate bonds will become the decision, including short-term financing bonds, including corporate bonds issued, one of the main factors of the transaction pricing, credit spreads not only have the necessity and urgency.

Research abroad

Since the mid-1990s, the "credit spread" to become the forefront of the Journal of Finance, Journal of Fixed Income and other international academic journals in the field of credit risk. Credit spreads connotation theory and measurement, estimation method is evolved on the basis of the theory of credit risk and pricing models. And on this basis, combined with the interest rate term structure model to carry out the existing credit spread term structure model and empirical research.

(A) Credit spreads connotation defined
The difference between the Western academia will yield corporate bonds and risk-free bonds with similar characteristics is called the spread. Was originally thought that the spread is entirely caused by the expected default risk (Rocha and Garcia, 2005). Brown (2001) that spreads mainly caused by the liquidity premium and the expected default risk of default losses, the three important components of the risk premium. Similar nature of this article will be caused by the expected default risk spreads between the bonds is defined as the narrow credit spreads (hereinafter referred to as the credit spread). Under the risk-neutral environment, this description of credit spreads. But in reality, most of the bondholders are risk averse, and will require an additional compensation they assumed the risk, default risk premium. Corporate default risk spreads should include the expected default loss compensation (default margin) and the risk premium between and definitions for generalized credit spreads.

(B) the impact of the credit spreads Factors
The actual economic environment to trigger an event of default occurs and changes in credit spreads many factors, such as the global economic crisis, changes in the real exchange rate of the state, the market is incomplete, bankruptcy, corporate accounting information disclosure, tax.
Das (1995), Longstaff and Schwartz (1995) pointed out that the credit spreads of bonds with short holding period is not sensitive to interest rate changes. However, empirical studies have found that short holding period bond credit spreads are sensitive to interest rate changes, such as Duffie (1997) pointed out that interest rates negatively correlated with short-term spreads, Madan and Unal (2000) also confirmed this point. Both "negative" relationship depends on differences in the duration of interest rate sensitive assets and liabilities. In contrast, long-term interest rates and short holding period bond credit spreads are positively correlated. Research, long-term interest rates and short-term interest rates on credit spreads should be discussed separately.
Another scholar on the relationship between credit spreads and bond yields. Pedrosa and Roll (1998) Application the 1987-1997 investment grade and non-investment grade bonds and the data analysis of the relationship between credit spreads and bond yields, and the remaining maturity of the corporate bonds as well as the credit quality of the bonds on credit spreads impact. Cornell and Green (1996) found that lower-rated corporate bonds yield to maturity than highly rated corporate bonds yield to maturity is less sensitive to changes in bond yields, and attributed it to the low-rated corporate bonds have a relatively lower duration and less restricted options features. Huang and Huang (2003), Lanschoot (2004) generalized credit spreads of bonds for the spot interest rates, bond yields, corporate bond index, and other factors made a regression analysis found that these factors explained by generalized credit spreads for bonds below 50%. Elton et.al (2001), Driessen (2003), taxes, liquidity and risk premium is an important factor to affect bond generalized credit spreads. Madan and Unal (2000) found that the loss rate and the average loss level for short holding period of the bond credit spreads affect larger duration differences and the volatility of the cash assets of the holders of a long period of bond credit spreads a greater impact, and the impact of the diffusion and lag.
In summary, different from the remaining period, different levels of credit sensitive bond credit spreads factors are different. Empirical analysis of credit spreads, principal component analysis, the results may be because of the different characteristics of the bonds, and also according to the different characteristics of the bonds of bonds matching the trend of the credit spread curve.

(C) Credit spreads model analysis
Some scholars from the model point of view the effects of credit spreads, which structural models help explain simple model function prediction.
The first is the structural model. The initial structural model based on Merton (1974). He reimbursement rates and default rates are assumed to be within the raw. And assume that the company has only bankruptcy only a breach of contract. First-passage time model based on this, and their descendants, Jump-diffusion model of the structural model is extended. In addition to the simple model (reduced-form model) and factor model. By Litterman and Iben (1991), Jarrow and Turnbull (1995), Duffie and Singleton (1999) proposed a simple model assumed that the reimbursement rate and the default rate are exogenous. Simple model to study the default intensity the (default indensity), credit spreads in the market value of recycling and the nominal value of recycling different. The earliest use of the model proposed by Merton and others to study credit spreads Jones, Mason and Rosenfeld (1984), they found that the credit spread predicted by Merton (1974) is far below the actual observed to corporate bonds and Treasuries level of spreads. Of Dionne et.al (2005) in Elton et.al (2001) simple model based on visits risk premium for default risk can explain the credit spreads of corporate bonds and government bonds to 80%. Changes in the explanatory power of the simple model of the field of credit spreads, to some extent, is set to cause the default rates and other explanatory variables exogenous.

(D) the term structure of credit spreads
Some scholars have made a study of the term structure of credit spreads, including Jarrow, Lando and Turnbull (1997) on the basis of Jarrow, Turnbull (1995), the bankruptcy process is assumed to follow a discrete Markov chain, the use of market data to estimate the deadline the structural parameters of the model. This model can be applied to credit derivatives, embedded options, bonds, OTC derivatives with counterparty risk, foreign government bonds with default risk pricing and hedging. Duffie and Singleton (1999) using the simple model of the term structure of corporate bonds. Aonuma and Tamabe (2001), Duffie and Singleton (1999) on the basis of estimates of the term structure of credit spreads, and the use of market data to calculate the implied term structure, the model can also be used to estimate the credit rating transition matrix, the reimbursement rate industry and corporate credit drift factors. Duffie and Lando (2001) model of the term structure of credit spreads incomplete accounting information.
(E) estimates of credit spreads and the fitting method
Estimated credit spreads most fundamental problem is to determine the most explanatory power of the discount factor, under certain conditions, the discount factor can make pricing error is minimized, and the least free parameters continuous function. Estimated model main difference is that the specific form of the discounting function, the number of free parameters and to determine the function of factors such as the discount factor, the functional form of zero-coupon bond yields, long-term interest rates. Credit spreads are more representative of the fitting method there are two types: one is a simple model of the nonlinear fitting method, such as the Nelson-Siegel, Svensson method; other is piecewise curve fitting techniques spline function linear fitting method, including the method of B-spline, polynomial spline and exponential spline method. Two types of methods have a single curve and curve fitting situations. Single multi-curve spline model, single curve spline model is improved by two points, one directly with simple spline model to estimate the credit spread curve, the second joint (jointly) estimated the basic zero-coupon yield curve and All credit spread curve.
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