The Empirical Research Of KMV’s Application In The Investment Of China’s High-yield Bond Market

With the high speed development of the economy and the rapid expansion of the credit bond market, China’s high-yield bond market gradually formed, which is comprised of the high-yield bonds of exchange markets, namely the "Fallen Angels", and the privately issued bonds of small and medium-sized enterprises, namely the "Rising Stars". High-yield bond, also known as the junk bond, has high yield and high risk, so it is an important issue about how to effectively measure the credit quality and default risk of high yield bond. This paper researches the high-yield bond market of China and modern credit risk measurement models, and on this basis this paper attempts to apply the modified KMV model into the investment of high-yield bond.This paper selects 30 high-yield bonds of the exchange markets as the objects of empirical study, and works out the parameters such as the equity value, stock volatility and default point based on the stock market data and financial data. Then the asset value and its volatility of the 30 bonds can be calculated out with the Newton-Raphson iterative method, and on this basis we have the monthly distance to default of the 30 bonds during January 2010 and September 2013. First, this paper compares the distance to default with independent sample T tests of public companies with different ratings such as AAA, AA+, AA, etc, which verifies that KMV model is suitable for China’s securities market. Second, regression analysis between the monthly distance to default and credit spread of the 30 bonds help to screen out 6 bonds which are efficiently priced by market, with which the summary sequence regression equation is established. Finally, the regression equation is used to predict and fit credit spread, whose results prove that KMV model can be effectively applied to the high-yield bond investment in China’s market.