Measuring Credit Risk of Individual Corporate Bonds in US Energy Sector

Kariya, Takeaki; Tanokura, Yoko; Takada, Hiroya; Yamamura, Yoshiro

doi:10.1007/s10690-016-9217-7

Cited by 2 publications

(1 citation statement)

References 12 publications

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“…One of the main factors for a dramatic change of a bond price is the credit-rating migration including default (see, for examples, Elton et al (2001); Bessembinder et al (2018)). The inflection and the liquidity risks in a corporate bond model are the other important factors (see, for examples, Kariya et al (2016) and Kang and Pflueger (2015)). We would like to point out that the tax is another important factor in bond modelling (see, for example, Kenneth et al (2018)).…”

Section: Introductionmentioning

confidence: 99%

On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate

Yin

Liang

2018

JRFM

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In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are allowed to happen a finite number of times during the life-span of the bond. The volatility of a corporate bond price may have a jump when a credit rating for the bond is changed. Moreover, the volatility of the bond is also assumed to depend on the interest rate. This new model improves the previous existing bond models in which the rating change is only allowed to occur once with an interest-dependent volatility or multi-ratings with constant interest rate. By using a Feynman-Kac formula, we obtain a free boundary problem. Global existence and uniqueness are established when the interest rate follows a Vasicek’s stochastic process. Calibration of the model parameters and some numerical calculations are shown.

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Section: Introductionmentioning

confidence: 99%

On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate

Yin

Liang

2018

JRFM

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Empirical Credit Risk Ratings of Individual Corporate Bonds and Derivation of Term Structures of Default Probabilities

Kariya

Yamamura

Inui

2019

JRFM

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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.

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Measuring Credit Risk of Individual Corporate Bonds in US Energy Sector

Cited by 2 publications

References 12 publications

On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate

On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate

Empirical Credit Risk Ratings of Individual Corporate Bonds and Derivation of Term Structures of Default Probabilities

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