Quotation Frühwirth, Manfred, Schneider, Paul, Sögner, Leopold. 2007. The Risk Microstructure of Corporate Bonds - A Bayesian Analysis. Annual Conference of the German Academic Association of Business Research, Paderborn, Deutschland, 31.05. - 2.06..


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Abstract

This article presents joint econometric analysis of interest rate risk, issuer-specific risk (credit risk) and bond-specific risk (liquidity risk) in a reduced-form framework. Although our model includes correlation between interest rate risk and issuer-specific risk, it allows sequential estimation of the risk-free term structure parameters and the issuer-specific as well as bond-specific components. Within the Bayesian framework we develop a methodology to estimate the model parameters and to separate the different components of risk. Via Markov Chain Monte Carlo methods and data augmentation we infer a risk-free term structure process from swap market data and, based on these estimates, estimate issuer-specific and bond-specific risk from corporate bond data in the German market. We find that bond-specific risk plays a crucial role in the pricing of corporate bonds. As regards issuer-specific risk, we find a strong impact of time, the (level and slope of the) risk-free term structure, the KMV distance to default and the lagged component and only a weak impact of the stock market variables (stock market index changes, returns of this particular stock, stock market volatility) on the issuer-specific component while there is no impact of the debt to value ratio. As regards bond-specific risk, we observe a strong impact of level and slope of the risk-free term structure and the lagged terms as well as a weak impact of the stock market variables and the distance to default on the bond-specific component without any impact of time or debt to value ratio. Among the bonds analyzed we observe large differences between the relative influence of issuer-specific vs. bond-specific spread and its volatility.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Paper presented at an academic conference or symposium
Language English
Title The Risk Microstructure of Corporate Bonds - A Bayesian Analysis
Event Annual Conference of the German Academic Association of Business Research
Year 2007
Date 31.05. - 2.06.
Country Germany
Location Paderborn
URL http://pbfb5www.uni-paderborn.de/www/fb5/wiwi-web.nsf/id/VHB-PB-2007

Associations

People
Frühwirth, Manfred (Details)
Schneider, Paul (Former researcher)
External
Sögner, Leopold (TU Wien, Austria)
Organization
Institute for Corporate Finance IN (Former organization)
Institute for Finance and Securities Design IN (Former organization)
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