A Comparison of Bond Pricing Models in the Pricing of Credit Risk

53 Pages Posted: 4 Jun 1999

Date Written: March 1999

Abstract

This paper compares alternative default-free bond pricing models in their abilities to price the credit risk of companies. The theoretical framework is the reduced-form approach of Duffie and Singleton (1999). The parameters of a CKLS (1992) type stochastic differential equation that describes the dynamics of the credit spreads on coupon bonds are estimated by using the GMM. The data are credit spreads of 112 coupon bonds from 26 companies over the period 1986-1994. The estimation takes into account biases toward mean reversion induced by the unit-root problem and survivorship. The findings support most strongly the Brennan and Schwartz (1980) model that implies credit spreads which are mean-reverting and lognormally distributed.

JEL Classification: C23, C24, G12, G13

Suggested Citation

Tauren, Miikka Petteri, A Comparison of Bond Pricing Models in the Pricing of Credit Risk (March 1999). Available at SSRN: https://ssrn.com/abstract=155688 or http://dx.doi.org/10.2139/ssrn.155688

Miikka Petteri Tauren (Contact Author)

Credit Suisse First Boston ( email )

11 Madison Avenue
New York, NY 10010
United States

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