Empirical Credit Risk Ratings of Individual Corporate Bonds and Derivation of Term Structures of Default Probabilities

Takeaki Kariya, Yoshiro Yamamura and Koji Inui
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Takeaki Kariya: Graduate School of International Administration, Josai International University, Tokyo 102-0094, Japan
Yoshiro Yamamura: Graduate School of Global Business, Meiji University, Tokyo 101-8301, Japan
Koji Inui: School of Interdisciplinary Mathematical Science, Meiji University, Tokyo 164-8525, Japan

JRFM, 2019, vol. 12, issue 3, 1-29

Abstract: Undoubtedly, it is important to have an empirically effective credit risk rating method for decision-making in the financial industry, business, and even government. In our approach, for each corporate bond (CB) and its issuer, we first propose a credit risk rating (Crisk-rating) system with rating intervals for the standardized credit risk price spread (S-CRiPS) measure presented by Kariya et al. (2015), where credit information is based on the CRiPS measure, which is the difference between the CB price and its government bond (GB)-equivalent CB price. Second, for each Crisk-homogeneous class obtained through the Crisk-rating system, a term structure of default probability (TSDP) is derived via the CB-pricing model proposed in Kariya (2013), which transforms the Crisk level of each class into a default probability, showing the default likelihood over a future time horizon, in which 1545 Japanese CB prices, as of August 2010, are analyzed. To carry it out, the cross-sectional model of pricing government bonds with high empirical performance is required to get high-precision CRiPS and S-CRiPS measures. The effectiveness of our GB model and the S-CRiPS measure have been demonstrated with Japanese and United States GB prices in our papers and with an evaluation of the credit risk of the GBs of five countries in the EU and CBs issued by US energy firms in Kariya et al. (2016a, b). Our Crisk-rating system with rating intervals is tested with the distribution of the ratings of the 1545 CBs, a specific agency’s credit rating, and the ratings of groups obtained via a three-stage cluster analysis.

Keywords: government bond (GB); credit risk price spread (CRiPS); corporate bond (CB); credit risk rating system; cluster analysis; Japan Rating & Investment Information Center (R&I) credit ratings; term structure of default probabilities (TSDP); investors’ behavior in the government bond market; default intensity model; fixed interval filtering (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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