Pricing Model Of Corporate Bonds Based On Transition Probability Matrix

Credit risk is one of the major risks in financial market. Along with the rapid development of Chinese enterprises bond market, reasonable pricing of corporate bonds is becoming more and more prominent, credit risk is one of the important factors which affect corporate bond prices. As the reasonable pricing of corporate bonds is based on the accurate measurement and evaluation of credit risk,studies of credit risk are becoming more and more active both in domestic and abroad in recent decades, a large number of methods have been published by scholars and institutions. These methods of credit risk evaluation can be divided as structural models and reduced form models.In this paper, based on the analysis of the influence factors of the credit risk and the rating principle of Dagong Credit Rating Company, we given a detailed introduction on structural model-Merton model and reduced form model-JLT model. As the corporate bond market of China don’t have enough credit rating data, and lack of history events of default, the JLT model was improved. Based on the weight average procedure and market time series data of bonds rating, we can obtain the experience transition probability matrix and Risk-neutral default probability respectively. Then, by Judging whether the economy is on the rising or recession based on the market macro economic data, the conditional transition probability matrix can be obtained. Finally, the bond pricing model was built through the discount of the bonds forwards, which is more appropriate for the Chinese market. The bonds issued in 2014 were selected to test the model. At last the shortage of the model, the application prospect of the model and the further research prospects of the model were summarized.