Credit Rating Migration Risk Measurement And Pricing

Changes in debt issuers' credit ratings may bring great risk to investers. So reasonable approach must be designed to meaure credit mitigation risk and credit mitigation model must be considered as one of the key blocks of credit risk management and credit-sensitive products pricing.Firstly, this dissertation analyzes the character of credit rating mitigation risk thoroughly, trys to find important factors that influce credit rating mitigation .Then tests whether credit rating mitigation is Markov Chain by analyzing the eigenvectors and eigenvalues of credit rating mitigation matrices.Secondly, on the base of Jarrow's(1997) credit rating mitigation matrices estimating approach, this dissertation focuses on the macro economic's influntion and assumes credit rating mitigation is Non-homogeneous Markov Chain conditional on macro economic risk factors. Then gives the connection between credit rating mitigation matrices and generator matrices, using digonalizing technology of matrix, proposes a new credit rating mitigation matrices estimating approach which considers both macro economic factor and time-varying factor. Positive study results show that the estimative error of this approach is smaller than the Cohort approach and Jarrow's approach, especially in the period which macro economic condition changing dramatically.Thirdly, basing on the Duffie and Singleton's(1999) market recovery on default corporate bond pricing model, this dissertation characterizes credit events using mean-reverting process with jumping, constructs corporate bond pricing model, then gets the closed-form solution of bond price through solving ODE. The parameters of this model can be easily calibrated using bond market price data. This model can be used to price corporate bond, calculate the term structure of credit spread and price credit derivatives.Fourthly, this dissertation estimates the parameters of the pricing model using market credit spread datas, estimating results show that this model can fit credit spread accurately. Then gives some examples to show how to use the pricing model.Finally, this dissertation discusses the development of our country's corporate market, analysis the function of our country's corporate market in the national economy, then concludes some shortcomings of our country's corporate market. Then bases on the analyzing of Chinese credit rating company's status in quo, some countermeasures are given on how to implement the credit rating mitigation risk measuring and pricing approach proposed by this dissertation in china .