scholarly journals Rating Migration and Bond Valuation: Towards Ahistorical Rating Migration Matrices and Default Probability Term Structures

2019 ◽  
Vol 5 (1) ◽  
pp. 12
Author(s):  
Brian Barnard
Keyword(s):  
Term Structure ◽  
Cash Flows ◽  
Default Probability ◽  
Reduced Form ◽  
Probability Of Default ◽  
Forward Rates ◽  
Bond Valuation ◽  
Term Structures ◽  
Probability Term ◽  
The Impact

The study examines rating migration, and default probability term structures obtained from rating migration matrices. It expands on the use of rating migration matrices with reduced form bond valuation models, by formally delineating the probability of default according to the likely rating paths of a bond, as implied by the rating migration matrix. Further, two alternatives are also considered. First, the cost of default is stipulated as the recovery of par according to the exit rating upon default. Also, in addition to stating the value of a bond in terms of expected cash flows, when considering the probability of default, the value of a bond is alternatively stated as the present value of all likely rating paths of the bond, discounted against the market risk-bearing bond forward rates of the different rating categories. The impact of term structure volatility and rating migration uncertainty on bond valuation is also considered.It is shown that the relationship between rating migration and default probability is complex, and the default probabilities of different rating categories are time-dependent and not isolated from each other. Also, rating migration resembles a delayed default process that influences default probabilities of subsequent intervals. The implications of a rating migration matrix may perhaps only be fully understood through simulation. This form one of the first points by which to evaluate rating migration matrices. The results of the valuation model show that historical rating migration matrices may not be optimal for pricing bonds ahistorically. A principal premise of the study is the dichotomy between historical values and ahistorical estimates, particularly with regards to rating migration. It is argued that historical estimates face two key shortcomings: they must be able to accurately forecast future rating migration and rating category intensities as a result, and they must specify a method to include rating migration uncertainty. An optimization model is delineated to extract ahistorical rating migration matrices from market prices. This too has implications that should be considered. In light of the above, reduced form models may have an advantage over structural models, in their ability to portray a far more sophisticated default process.

CDS-based implied probability of default estimation

2020 ◽  
Vol 21 (4) ◽  
pp. 399-422
Author(s):  
Amira Abid ◽  
Fathi Abid ◽  
Bilel Kaffel
Keyword(s):  
Credit Risk ◽  
Term Structure ◽  
Transition Matrix ◽  
Risk Model ◽  
Default Probability ◽  
Probability Of Default ◽  
Content Type ◽  
Thomson Reuters ◽  
Investment Grade ◽  
Implied Default Probability

Purpose This study aims to shed more light on the relationship between probability of default, investment horizons and rating classes to make decision-making processes more efficient. Design/methodology/approach Based on credit default swaps (CDS) spreads, a methodology is implemented to determine the implied default probability and the implied rating, and then to estimate the term structure of the market-implied default probability and the transition matrix of implied rating. The term structure estimation in discrete time is conducted with the Nelson and Siegel model and in continuous time with the Vasicek model. The assessment of the transition matrix is performed using the homogeneous Markov model. Findings The results show that the CDS-based implied ratings are lower than those based on Thomson Reuters approach, which can partially be explained by the fact that the real-world probabilities are smaller than those founded on a risk-neutral framework. Moreover, investment and sub-investment grade companies exhibit different risk profiles with respect of the investment horizons. Originality/value The originality of this study consists in determining the implied rating based on CDS spreads and to detect the difference between implied market rating and the Thomson Reuters StarMine rating. The results can be used to analyze credit risk assessments and examine issues related to the Thomson Reuters StarMine credit risk model.

scholarly journals Analysis on financing structure and default probability of listed companies

2021 ◽  
Vol 292 ◽  
pp. 02032
Author(s):  
Xiangyun Luo ◽  
Miao Luo
Keyword(s):  
Cash Flow ◽  
Default Risk ◽  
Listed Companies ◽  
Mediating Effect ◽  
Default Probability ◽  
Probability Of Default ◽  
Financing Structure ◽  
Debt Default ◽  
Cash Flow Risk ◽  
The Impact

This paper studies the relationship between the financing structure and the probability of default of A-share listed companies from 2001 to 2020. The purpose is to prevent the occurrence of default and ensure the healthy development of various industries. It is found that the higher the proportion of external financing is, the higher the probability of default is. The impact of debt financing on default risk is higher than equity financing. In addition, this paper tests the mediating effect of cash flow risk, and the effect of financing structure on debt default probability is heterogeneous among regions and enterprises. These findings show that enterprises must control their financing structure, optimize the allocation of resources, prevent cash flow risk, reduce the probability of debt default, so as to make various industries flourish and optimize the industrial structure.

scholarly journals Volatility Timing: Pricing Barrier Options on DAX XETRA Index

Mathematics ◽  
2020 ◽  
Vol 8 (5) ◽  
pp. 722
Author(s):  
Carlos Esparcia ◽  
Elena Ibañez ◽  
Francisco Jareño
Keyword(s):  
Option Pricing ◽  
Term Structure ◽  
Barrier Options ◽  
Barrier Option ◽  
Probability Term ◽  
Volatility Timing ◽  
The Right ◽  
The Impact ◽  
Complementary Study ◽  
Frequency Current

This paper analyses the impact of different volatility structures on a range of traditional option pricing models for the valuation of call down and out style barrier options. The construction of a Risk-Neutral Probability Term Structure (RNPTS) is one of the main contributions of this research, which changes in parallel with regard to the Volatility Term Structure (VTS) in the main and traditional methods of option pricing. As a complementary study, we propose the valuation of options by assuming a constant or historical volatility. The study implements the GARCH (1,1) model with regard to the continuously compound returns of the DAX XETRA Index traded at daily frequency. Current methodology allows for obtaining accuracy forecasts of the realized market barrier option premiums. The paper highlights not only the importance of selecting the right model for option pricing, but also fitting the most accurate volatility structure.

A MARKOVIAN DEFAULTABLE TERM STRUCTURE MODEL WITH STATE DEPENDENT VOLATILITIES

2007 ◽  
Vol 10 (01) ◽  
pp. 155-202 ◽  
Author(s):  
CARL CHIARELLA ◽  
CHRISTINA NIKITOPOULOS SKLIBOSIOS ◽  
ERIK SCHLÖGL
Keyword(s):  
Diffusion Process ◽  
Interest Rates ◽  
Term Structure ◽  
Forward Rate ◽  
Term Structure Model ◽  
Forward Rates ◽  
Defaultable Bond ◽  
Term Structures ◽  
State Dependent ◽  
Path Independence

The defaultable forward rate is modelled as a jump diffusion process within the Schönbucher [26,27] general Heath, Jarrow and Morton [20] framework where jumps in the defaultable term structure fd(t,T) cause jumps and defaults to the defaultable bond prices Pd(t,T). Within this framework, we investigate an appropriate forward rate volatility structure that results in Markovian defaultable spot rate dynamics. In particular, we consider state dependent Wiener volatility functions and time dependent Poisson volatility functions. The corresponding term structures of interest rates are expressed as finite dimensional affine realizations in terms of benchmark defaultable forward rates. In addition, we extend this model to incorporate stochastic spreads by allowing jump intensities to follow a square-root diffusion process. In that case the dynamics become non-Markovian and to restore path independence we propose either an approximate Markovian scheme or, alternatively, constant Poisson volatility functions. We also conduct some numerical simulations to gauge the effect of the stochastic intensity and the distributional implications of various volatility specifications.

PCA-BASED EX-ANTE FORECASTING OF SWAP TERM STRUCTURES

2009 ◽  
Vol 12 (04) ◽  
pp. 465-489 ◽  
Author(s):  
OLIVER BLASKOWITZ ◽  
HELMUT HERWARTZ
Keyword(s):  
Term Structure ◽  
Principal Component ◽  
Cash Flows ◽  
Data Driven ◽  
Selection Strategy ◽  
Adaptive Model ◽  
Var Models ◽  
Vector Autoregressive ◽  
Term Structures ◽  
Forecasting Performance

In this study, we forecast the term structure of EURIBOR swap rates by means of rolling vector autoregressive (VAR) models. In advance, a principal component analysis (PCA) is adopted to reduce the dimensionality of the term structure. To statistically assess the forecasting performance for particular rates and the level, slope and curvature of the swap term structure, we rely on the Henrikkson–Merton statistic. Economic performance is investigated by means of cash flows implied by alternative trading strategies. Finally, a data-driven, adaptive model selection strategy to "predict the best forecasting model" out of a set of 100 alternative PCA/VAR implementations is shown to outperform forecasting schemes that rely on global homogeneity of the term structure.

Sign in / Sign up

Export Citation Format

Share Document