Bond-Valuation and Default-Risk Re-examined: A Post Reduced-Form Model Based on Integer Migration and Portfolio Migration

57 Pages Posted: 30 Jul 2019

See all articles by Brian Barnard

Brian Barnard

University of the Witwatersrand - Wits Business School

Date Written: July 26, 2019

Abstract

The study re-examines bond valuation and default risk, by considering and relaxing assumptions regarding integer rating migration, and portfolio rating migration, and consequently the implied degree of diversification. A reduced form model, based on (a) rating migration (matrix), serve as basis and starting point. The study subsequently moves towards a post reduced form bond valuation model, by considering portfolio migration and integer migration. Portfolio migration refers to actual counts of issues migrating across rating categories, between the intervals of the portfolio – the number of issues with a particular rating at a particular point in time. Integer migration considers the fact that only integer counts of issues can migrate. Both portfolio and integer migration imply more sophisticated interpretation of rating migration matrices. Portfolio migration and integer migration result in interval rating category issue count probability distributions, and issue interval rating category intensity (probability) probability distributions, and consequently cause more sophisticated issue interval cash flow distributions to form. The resultant post reduced form model issue price results are encouraging and promising, and are briefly considered.

Keywords: Bond valuation, default risk, reduced form model, rating migration, diversification

Suggested Citation

Barnard, Brian, Bond-Valuation and Default-Risk Re-examined: A Post Reduced-Form Model Based on Integer Migration and Portfolio Migration (July 26, 2019). Available at SSRN: https://ssrn.com/abstract=3427127 or http://dx.doi.org/10.2139/ssrn.3427127

Brian Barnard (Contact Author)

University of the Witwatersrand - Wits Business School ( email )

Johannesburg
South Africa

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