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Default Risk Characteristics of Poll-Based Bond Spreads

Author

Listed:
  • Jayadev M.

    (Jayadev M. (corresponding author), Associate Professor, Indian Institute of Management, Bannerghatta Road, Bangalore 560076, India. E-mail: jayadevm@iimb.ernet.in)

  • Joshy Jacob

    (Joshy Jacob, Visiting Assistant Professor, Indian Institute of Management, Vastrapur, Ahmedabad 380015, India. E-mail: joshyjacob@iimahd.ernet.in)

Abstract

Poor liquidity of corporate bonds in emerging markets deters reliable estimation of credit spreads. As an alternative, credit spreads based on poll data are introduced in India. These spreads are used for pricing new credit instruments and for valuation of bond portfolios. We examine the credit risk characteristics of these spreads based on the structural models of bond pricing. We find that the spreads are largely deter-mined by the proxies of default probability and recovery rate. Also, the relation between spreads and important credit risk variables is as predicted by the models. These results support the use of poll-based credit spreads. Introducing poll-based spreads in less liquid corporate bond markets is likely to offer a reliable basis for pricing credit instruments and derivatives.

Suggested Citation

  • Jayadev M. & Joshy Jacob, 2010. "Default Risk Characteristics of Poll-Based Bond Spreads," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 9(1), pages 51-70, April.
    • Handle: RePEc:sae:emffin:v:9:y:2010:i:1:p:51-70
    DOI: 10.1177/097265271000900103
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    References listed on IDEAS

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    Cited by:

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    More about this item

    Keywords

    JEL Classification: G12; JEL Classification: G13; Credit spreads; structural models; bond pricing; emerging markets;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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