Monte Carlo Valuation of Corporate Bonds Using Price Data

<p>Corporate debt securities play a large part in financial markets and hence accurate modeling of the prices of these securities is integral. Ericsson and Reneby (2005) state that the corporate bond market in the US doubled between 1995 and 2005 and is now larger than the market for US treasuries. Although the theoretical corporate bond pricing literature is vast, very little empirical research to test the effectiveness of these models has been published. Corporate bond pricing models are split into two families of models. The first, are the structural models which endogenise default by modeling it as an event that may eventuate due to the insolvency of the underlying firm. The second family of models is the newer class of reduced-form models that exogenise default by modeling it as some random process (default intensity). The reduced-form models have been formulated largely due to the empirical failures of the structural family to accurately model prices and spreads. However as Ericsson and Reneby (2005) point out, an inadequate estimation approach may explain the poor performance of the structural models. Structural models are, therefore, the focus of this paper. We, however, do estimate a reduced-form model in order to make a comparison between the two types of model. There are no published papers (to my knowledge) in which both types of model are implemented ...</p>

Monte Carlo Valuation of Corporate Bonds Using Price Data

<p>Corporate debt securities play a large part in financial markets and hence accurate modeling of the prices of these securities is integral. Ericsson and Reneby (2005) state that the corporate bond market in the US doubled between 1995 and 2005 and is now larger than the market for US treasuries. Although the theoretical corporate bond pricing literature is vast, very little empirical research to test the effectiveness of these models has been published. Corporate bond pricing models are split into two families of models. The first, are the structural models which endogenise default by modeling it as an event that may eventuate due to the insolvency of the underlying firm. The second family of models is the newer class of reduced-form models that exogenise default by modeling it as some random process (default intensity). The reduced-form models have been formulated largely due to the empirical failures of the structural family to accurately model prices and spreads. However as Ericsson and Reneby (2005) point out, an inadequate estimation approach may explain the poor performance of the structural models. Structural models are, therefore, the focus of this paper. We, however, do estimate a reduced-form model in order to make a comparison between the two types of model. There are no published papers (to my knowledge) in which both types of model are implemented ...</p>

Do participants in the bond market care about corporate social responsibility? Evidence from China

PurposeUsing a sample of listed Chinese companies that issued bonds from 2010 to 2019, the authors empirically test the link between CSR and corporate bond pricing, and the mechanism and channels behind this link.Design/methodology/approachThis study systematically examines whether and how corporate social responsibility (CSR) affects the corporate bond market in China.FindingsFirms with better CSR have higher corporate bond credit ratings and lower corporate bond yield spreads. These associations remain stable in robustness checks, including checks that use regional typhoon disaster as an instrumental variable. The effects of CSR are more significant for firms with a worse information environment and for those operating in high-risk environments. Better CSR is associated with less earnings management, fewer financial restatements and less analyst forecast divergence. In addition, the effects of CSR are more pronounced after the 2013 market-oriented reform and when issuers are non-state-owned enterprises.Practical implicationsBecause market participants can incorporate firms' CSR into their decision-making, establishing an effective channel for communicating CSR between issuers and market participants will enhance the effects of CSR.Social implicationsResearchers need to attend to the mechanisms behind the link between CSR and corporate bond pricing, and to the characteristics of strong environmental contingency in emerging markets, specifically the periods and scenarios in which the effects of CSR change.Originality/valueThis study provides systemic evidence that CSR benefits corporate bond pricing through both informational and reputational channels and that the effects of CSR vary by time and firm. These findings enrich the literatures on both the economic consequences of CSR and the determinants of corporate bond pricing, and provide a plausible explanation for mixed findings on the effects of CSR in previous studies.

Pricing Corporate Bonds with Credit Risk, Liquidity Risk, and Their Correlation

This paper proposes a generalized bond pricing model, accounting for all the effects of credit risk, liquidity risk, and their correlation. We use an informed trading model to specify the bond liquidity payoff and analyze the sources of liquidity risk. We show that liquidity risk arises from reduced information accuracy and market risk tolerance, and it is market risk tolerance that links credit and liquidity. Then, we extend the traditional bond pricing model with only credit risk by incorporating liquidity risk into the framework in which the probabilities of the two risk events are estimated by a joint distribution. Using numerical examples, we analyze the role of the correlation between credit and liquidity in bond pricing, especially during a financial crisis. We document that the varying correlation between default and illiquidity explains the phenomenon of bond death spiral observed in a financial crisis. Finally, we take the US corporate bond market as an example to demonstrate our conclusions.