Undoubtedly, it is important to have an empirically effective credit risk rating method for decision-making in the financial industry, business, and even government. In our approach, for each corporate bond (CB) and its issuer, we first propose a credit risk rating (Crisk-rating) system with rating intervals for the standardized credit risk price spread (S-CRiPS) measure presented by Kariya et al. (2015), where credit information is based on the CRiPS measure, which is the difference between the CB price and its government bond (GB)-equivalent CB price. Second, for each Crisk-homogeneous class obtained through the Crisk-rating system, a term structure of default probability (TSDP) is derived via the CB-pricing model proposed in Kariya (2013), which transforms the Crisk level of each class into a default probability, showing the default likelihood over a future time horizon, in which 1545 Japanese CB prices, as of August 2010, are analyzed. To carry it out, the cross-sectional model of pricing government bonds with high empirical performance is required to get high-precision CRiPS and S-CRiPS measures. The effectiveness of our GB model and the S-CRiPS measure have been demonstrated with Japanese and United States GB prices in our papers and with an evaluation of the credit risk of the GBs of five countries in the EU and CBs issued by US energy firms in Kariya et al. (2016a, b). Our Crisk-rating system with rating intervals is tested with the distribution of the ratings of the 1545 CBs, a specific agency’s credit rating, and the ratings of groups obtained via a three-stage cluster analysis.
In this paper, we make a comprehensive credit risk analysis on government bonds (GBs) of Germany, France, Italy, Spain and Greece over the period 2007.4-2012.3, where interest rate (IR) differential, GB price differential, default probability (DP) and credit default swap (CDS) are considered. First, applying the GBpricing model in Kariya (Quantitative methods for portfolio analysis: MTV approach. Springer, Berlin, 1993) to these GB prices, we derive the term structures of interest rates (TSIRs) and discuss on the Maastricht convergence condition for the IR-differentials among these states relative to the German TSIRs and make some observations on some divergent tendencies. The results are associated with the business cycles and budgetary condition of each state. In the second part, to substantiate this viewpoint, we first make credit risk price spread analysis on price differentials and derive the term structures of default probabilities (TSDPs) of the French, Italian, Spanish and Greek GBs relative to the German GBs, where the corporate bond (CB) model proposed in Kariya
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.