The Effect of Unfunded Pension Liabilities on Corporate Bond Ratings, Default           Risk, and Recovery Rate

In this paper, we consider a robust optimal investment-reinsurance problem with a default risk. The ambiguity-averse insurer (AAI) may carry out transactions on a risk-free asset, a stock, and a defaultable corporate bond. The stock’s price is described by a jump-diffusion process, and both the jump intensity and the distribution of jump amplitude are uncertain, i.e., the jump is ambiguous. The AAI’s surplus process is assumed to follow an approximate diffusion process. In particular, the reinsurance premium is calculated according to the generalized mean-variance premium principle, and the reinsurance type has to follow a self-reinsurance function. In performing dynamic programming, both the predefault case and the postdefault case are analyzed, and the optimal strategies and the corresponding value functions are derived under the worst-case scenario. Moreover, we give a detailed proof of the verification theorem and give some special cases and numerical examples to illustrate our theoretical results.

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The Determinants of Credit Default Swap Premia

Journal of Financial and Quantitative Analysis ◽

10.1017/s0022109009090061 ◽

2009 ◽

Vol 44 (1) ◽

pp. 109-132 ◽

Cited By ~ 365

Author(s):

Jan Ericsson ◽

Kris Jacobs ◽

Rodolfo Oviedo

Keyword(s):

Default Risk ◽

Common Factor ◽

Explanatory Power ◽

Empirical Work ◽

Credit Default Swap ◽

Principal Component ◽

Corporate Bond ◽

Credit Default ◽

Default Swap ◽

Swap Spreads

AbstractVariables that in theory determine credit spreads have limited explanatory power in existing empirical work on corporate bond data. We investigate the linear relationship between theoretical determinants of default risk and default swap spreads. We find that estimated coefficients for a minimal set of theoretical determinants of default risk are consistent with theory and are significant statistically and economically. Volatility and leverage have substantial explanatory power in univariate and multivariate regressions. A principal component analysis of residuals and spreads indicates limited evidence for a residual common factor, confirming that the theoretical variables explain a significant amount of the variation in the data.

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Pricing Strategy and Corporate Bond Value

International Journal of Operations Research and Information Systems ◽

10.4018/joris.2012070103 ◽

2012 ◽

Vol 3 (3) ◽

pp. 40-52 ◽

Cited By ~ 3

Author(s):

Min Shi ◽

Wei Yu

Keyword(s):

Financial Markets ◽

Airline Industry ◽

Default Risk ◽

Time Windows ◽

Corporate Bond ◽

Pricing Strategy ◽

Industry Data ◽

Bond Returns ◽

Study Methodology ◽

Event Study Methodology

Pricing strategy is expected to impose profound impacts on a firm’s cash flow and default risk. However, little research has been done to examine its direct impacts on financial markets. Applying event study methodology on the airline industry data, this paper aims to fill this gap by investigating whether and how corporate bond value is affected by pricing cut events in the airline industry in various time windows. The authors’ empirical results find significant positive abnormal bond returns in the announcement month. However, the price effect becomes insignificant and vanishes in the following months. By integrating financial market and marketing behavior analysis, this paper provides managerial insights for both marketing managers and corporate bond investors.

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Can Structural Models Price Default Risk? Evidence from Bond and Credit Derivative Markets

Quarterly Journal of Finance ◽

10.1142/s201013921550007x ◽

2015 ◽

Vol 05 (03) ◽

pp. 1550007 ◽

Cited By ~ 7

Author(s):

Jan Ericsson ◽

Joel Reneby ◽

Hao Wang

Keyword(s):

Default Risk ◽

Structural Models ◽

Credit Default Swap ◽

Corporate Bond ◽

Credit Default ◽

Credit Derivative ◽

Risk Free Rate ◽

Derivative Markets ◽

Bond Spreads ◽

Free Rate

Using a set of structural models, we evaluate the price of default protection for a sample of US corporations. In contrast to previous evidence from corporate bond data, credit default swap (CDS) premia are not systematically underestimated. In fact, one of our studied models has little difficulty on average in predicting their level. For robustness, we perform the same exercise for bond spreads by the same issuers on the same trading date. As expected, bond spreads relative to the treasury curve are systematically underestimated. This is not the case when the swap curve is used as a benchmark, suggesting that previously documented underestimation results may be sensitive to the choice of risk-free rate.

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