A CB (corporate bond) pricing probabilities and recovery rates model for deriving default probabilities and recovery rates

摘要

In this paper we formulate a corporate bond (CB) pricing model for derivingthe term structure of default probabilities (TSDP) and the recovery rate (RR)for each pair of industry factor and credit rating grade, and these derivedTSDP and RR are regarded as what investors imply in forming CB prices in themarket at each time. A unique feature of this formulation is that the modelallows each firm to run several business lines corresponding to some industrycategories, which is typical in reality. In fact, treating all thecross-sectional CB prices simultaneously under a credit correlation structureat each time makes it possible to sort out the overlapping business lines ofthe firms which issued CBs and to extract the TSDPs for each pair of individualindustry factor and rating grade together with the RRs. The result is appliedto a valuation of CDS (credit default swap) and a loan portfolio management inbanking business.