A hidden Markov chain model for the term structure of bond credit risk spreads
A hidden Markov chain model for the term structure of bond credit risk spreads
This paper provides a Markov chain model for the term structure and credit risk spreads of bond prices. It allows dependency between the stochastic process modeling the interest rate and the Markov chain process describing changes in the credit rating of the bonds by their mutual dependency on a hidden Markov chain, which can be thought of as describing the underlying economic conditions. The model also allows a new interpretation of risk premia used in previous approaches and also uses a linear programming approach to strip the bonds of their coupons in such a way as to guarantee there is no mispricing.
311-329
Thomas, Lyn C.
a3ce3068-328b-4bce-889f-965b0b9d2362
Allen, David E.
74df427c-ff62-4280-b16c-9d43b9767c3a
Morkel-Kingsbury, Nigel
ba48dab8-3d85-40d7-aa8b-cfbdfe16300e
2002
Thomas, Lyn C.
a3ce3068-328b-4bce-889f-965b0b9d2362
Allen, David E.
74df427c-ff62-4280-b16c-9d43b9767c3a
Morkel-Kingsbury, Nigel
ba48dab8-3d85-40d7-aa8b-cfbdfe16300e
Thomas, Lyn C., Allen, David E. and Morkel-Kingsbury, Nigel
(2002)
A hidden Markov chain model for the term structure of bond credit risk spreads.
International Review of Financial Analysis, 11 (3), .
(doi:10.1016/S1057-5219(02)00078-9).
Abstract
This paper provides a Markov chain model for the term structure and credit risk spreads of bond prices. It allows dependency between the stochastic process modeling the interest rate and the Markov chain process describing changes in the credit rating of the bonds by their mutual dependency on a hidden Markov chain, which can be thought of as describing the underlying economic conditions. The model also allows a new interpretation of risk premia used in previous approaches and also uses a linear programming approach to strip the bonds of their coupons in such a way as to guarantee there is no mispricing.
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Published date: 2002
Identifiers
Local EPrints ID: 35669
URI: http://eprints.soton.ac.uk/id/eprint/35669
ISSN: 1057-5219
PURE UUID: 85dd8f62-8aa9-425e-a0a9-742035275014
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Date deposited: 22 May 2006
Last modified: 15 Mar 2024 07:53
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Author:
Lyn C. Thomas
Author:
David E. Allen
Author:
Nigel Morkel-Kingsbury
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