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Corporate Bond Risk in the Brazilian Capital Market (Risco de Crédito e Alocação Ótima para uma Carteira de Debêntures) (Portuguese)

Est. Economics, Vol. 38, No. 2, pp. 349-372, 2008

24 Pages Posted: 11 Sep 2010 Last revised: 15 Sep 2010

André Cadme Godoy

affiliation not provided to SSRN

Rogério de Deus Oliveira

Barclays Investment Bank

Joe Akira Yoshino

University of Sao Paulo (USP) - Department of Economics

Date Written: October 11, 2007

Abstract

The debenture (corporate bond) is considered a great financial instrument in terms of funding for the non-financial firms in the Brazilian market. The intermediation would be done in the capital market instead of through the commercial banks. The key issue for the development of this market is the financial engineering involving the credit risk (chance that the corporate issuer can default on its debt obligation). This paper proposes and tests a methodology to quantify this risk in a cross-section of Brazilian debentures. Our approach is based on Merton’s (1974) asset pricing model that uses the Black-Schole’s put option formula. The consequent optimization techniques allow us to infer the risk of debentures. By using a simple and low-cost model, we find a risk measure that is more conservative than the usual VaR (value at risk). Thus, we present a methodology for obtaining the optimum portfolio composed of debentures subject to the default risk.

Notes: Downloadable document is in Portuguese.

Keywords: credit risk, corporate bonds, maximum loss, Merton’s Asset Pricing Model

JEL Classification: G12, G32

Suggested Citation

Godoy, André Cadme and Oliveira, Rogério de Deus and Yoshino, Joe Akira, Corporate Bond Risk in the Brazilian Capital Market (Risco de Crédito e Alocação Ótima para uma Carteira de Debêntures) (Portuguese) (October 11, 2007). Est. Economics, Vol. 38, No. 2, pp. 349-372, 2008. Available at SSRN: https://ssrn.com/abstract=1675307

André Cadme Godoy

affiliation not provided to SSRN ( email )

Rogério De Deus Oliveira

Barclays Investment Bank ( email )

5 The North Colonnade
London, Canary Wharf E14 4BB
United Kingdom

Joe Akira Yoshino (Contact Author)

University of Sao Paulo (USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-900
Brazil

HOME PAGE: http://www.usp.br/feaecon/perfil.php?i=10&u=57

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