Research On Credit Spread Of Corporate Bond Based On Reduced Form Model

Credit risk (also called default risk) refers to the loss due to the unexpected change of the counterparty's credit quality, including credit downgrade, disability to repay, bankruptcy and liquidity. With the rapid development of corporate bond market and the global financial innovation, especially the breaking out of sub-prime crisis, the importance of credit risk in asset pricing and risk management is known to all. Although China's corporate bond market is not as developed as that of the US and the Europe, the innovation in this field is growing rapidly. Therefore research on credit risk has significant theoretical and practical meaning to China's corporate bond market.This paper firstly compares the structural model and reduced form model, and then mainly focuses on the credit risk in China's corporate bond. This paper uses the method of Duffie and Singleton, which is, based on the reduced form model, using discount rate to calculate the value directly. The discount rate equals risk-free rate plus credit risk premium. The default probability follows a Poisson process with the intensityλ, in addition, we assume default intensityλas a square root process, and provide explicit solution for credit risk corporate bond price. For each class of bond, this paper estimates the parameters of the model and the implied intensity process by fitting to a cross section of corporate bond price. And then, I compare the default intensity of two classes of bond, and compare the model efficiency of the model I use in this paper with that of a simple model. Finally, I analyze the credit spread of corporate bonds. The programming language is MATLAB.The innovations of this paper are using different data to compare the difference of default intensity of two classes of corporate bond and using the same data to compare different models' efficiency. In addition, this paper tries to separate liquidity premium from the credit spread.