Est. Economics, Vol. 38, No. 2, pp. 349-372, 2008
24 Pages Posted: 11 Sep 2010 Last revised: 15 Sep 2010
Date Written: October 11, 2007
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: 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