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Empirical Evaluation of Hybrid Defaultable Bond Pricing Models

Author

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  • S. Antes
  • M. Ilg
  • B. Schmid
  • R. Zagst

Abstract

A four-factor model (the extended model of Schmid and Zagst) is presented for pricing credit risk related instruments such as defaultable bonds or credit derivatives. It is an advancement of an earlier three-factor model. In addition to a firm-specific credit risk factor, a new systematic risk factor in the form of GDP growth rate is included. This new model is set in the context of other hybrid defaultable bond pricing models and empirically compared to specific representatives. We find that a model based only on firm-specific variables is unable to capture changes in credit spreads completely. However, it is shown that in this model, market variables such as GDP growth rates, non-defaultable interest rates and firm-specific variables together significantly influence credit spread levels and changes.

Suggested Citation

  • S. Antes & M. Ilg & B. Schmid & R. Zagst, 2008. "Empirical Evaluation of Hybrid Defaultable Bond Pricing Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 15(3), pages 219-249.
    • Handle: RePEc:taf:apmtfi:v:15:y:2008:i:3:p:219-249
    DOI: 10.1080/13504860701718430
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    Cited by:

    1. Stephan Höcht & Rudi Zagst, 2010. "Pricing credit derivatives under stochastic recovery in a hybrid model," Applied Stochastic Models in Business and Industry, John Wiley & Sons, vol. 26(3), pages 254-276, May.

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