An Empirical Analysis Of The Pricing Model Of Credit Risk Mitigation Tools

Bond market is a very important part of China's financial market.Recent years,in the process of continuous development of the bond market,credit risk has been accumulating and default events have occurred frequently.Since the "11 super bonds"incident in 2014,the number and scale of bond defaults have been increasing.By 2016,bond defaults had exploded.In order to cope with the frequent bond defaults,the China association of inter-bank market dealers issued the "pilot business rules of credit risk mitigation tools in the inter-bank market".By setting up new products,it lowered the threshold,simplifying the process and adjusting the regulatory framework.the business system of credit risk mitigation was reorganized.After then,many banks have actively introduced credit risk mitigation to support enterprise bond financing.The role of credit risk mitigation to manage the bond default risk is increasingly prominent.Due to the short time since the introduction of credit risk mitigation in China,the pricing model is not perfect,how to effectively price credit risk mitigation is an urgent problem to be solved,that has important practical significance.After introducing the concept of credit risk mitigation and its development in China,this paper analyzed its transaction structure and function.The main functions of credit risk mitigation tools are credit risk management and price discovery.Based on the transaction data of 49 credit risk mitigation warrants in the wind database,the factors affecting the price of credit risk mitigation are analyzed quantitatively.By comparing the structured model and the reduced model,this paper choosed the reduced model which assumes the event of default obeys the poisson,considering the reasons such as the imperfect information disclosure mechanism in China.The relevant data of the 49 credit risk mitigation warrants were substituted into the pricing formula for verification,and then the formula was verified again by different default recovery rates.The results shows that:(1)The price of the credit risk mitigation is positively correlated with the duration of credit protection and the coupon rate of the underlying bond,and negatively correlated with the credit rating of the underlying bond,the price of the underlying bond and the risk-free interest rate;(2)The credit risk mitigation can be priced according to the reduced model.We can see that the price is mainly composed of default probability density and credit protection period and the risk-free interest rate decisions,the default probability density can be calculated by the price model to evaluate corporate bonds with the par value of the bond and coupon,bond maturity,and the risk-free interest rate,;(3)The price calculated by formula is nearly equal to the actual price after the data substitution,and the pricing formula is basically effective.The higher the default recovery rate,the more fit the formula price with the actual price.The reason for the deviation may be that the counterparty risk is not considered in the model.So we should consider the existence of counterparty risk and other risks,explore a more reasonable risk-free interest rate,constantly improve the bond credit rating system,improve basic data of the pricing of credit risk mitigation,expand the range of optional models,and then we can price the credit risk mitigation more reasonably.