2017
DOI: 10.2139/ssrn.2948352
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Rating Migration and Bond Valuation: Ahistorical Interest Rate and Default Probability Term Structures

Abstract: The study extends the theoretical framework proposed to decompose rating migration matrices from bond market price data. Method to decompose default probability term structures for and from interest rate term structures for different rating categories, is delineated and empirically evaluated. Emphasis is squarely on using ahistorical (non-historical) market data, and utilizing actual market perceptions regarding default probabilities. The method naturally allows a mapping and transitioning between interest rat… Show more

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Cited by 5 publications
(4 citation statements)
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“…The actual decomposition of the rating category default probability term structures from the price data of the bonds, via the rating category interest rate term structures, is not conducted here, but taken from Barnard (2017b).…”
Section: Methodsmentioning
confidence: 99%
See 2 more Smart Citations
“…The actual decomposition of the rating category default probability term structures from the price data of the bonds, via the rating category interest rate term structures, is not conducted here, but taken from Barnard (2017b).…”
Section: Methodsmentioning
confidence: 99%
“…Equation 4 and 6 may still be complex, computationally expensive, and may still be improved upon, in particular by sourcing better initial solutions. As illustrated by Barnard (2017b), one option may be to first decompose default probability term structures per rating category. This can then be used to decompose or work towards a rating migration matrix.…”
Section: Decomposing Default Probability Term Structures From Market Datamentioning
confidence: 99%
See 1 more Smart Citation
“…Brian Barnard proves that the relationship between rating migration and default probability is complex, and the default probability of different rating classes is timedependent rather than independent of each other. Rating migration is analogous to a delayed default process, affecting the probability of default in subsequent intervals [4]. Matthew Kurbat et al selected a large number of corporate debt data in the United States from 1991 to 2001, and used a more practical method to test the KMV model.…”
Section: Introductionmentioning
confidence: 99%