Default Propensity Implicit in Pulled to Par V@r for Bonds

Discussiones Mathematicae Probability and Statistics 37 (2017) 79–99

22 Pages Posted: 3 Aug 2020

See all articles by Manuel L. Esquível

Manuel L. Esquível

FCT, Universidade Nova de Lisboa

Raquel M. Gaspar

ISEG and Cemapre/REM, Universidade de Lisboa

João Beleza Sousa

Instituto Superior de Engenharia de Lisboa (ISEL)

Date Written: 2017

Abstract

Using the pulled to par returns, proposed by [27] for computing historical V@R of bonds, we develop a way of extracting – at any reference date before maturity – implicit default propensities from observed bond quotes. This method is new to the literature and it has the advantage on focusing directly on loss given default. To illustrate the method we present two examples of actual computation with real data – on German and Portuguese bonds. The market data seems to support the proposed method. In the case of a very concrete simple Gaussian model, we establish the connection between our implicit default propensity and the more traditional notions of default probability and recovery given default of a bond.

Keywords: value-at-risk, bonds, default probability, recovery given default

JEL Classification: G29

Suggested Citation

Esquível, Manuel and Gaspar, Raquel M. and Beleza Sousa, João, Default Propensity Implicit in Pulled to Par V@r for Bonds (2017). Discussiones Mathematicae Probability and Statistics 37 (2017) 79–99, Available at SSRN: https://ssrn.com/abstract=3645070

Manuel Esquível (Contact Author)

FCT, Universidade Nova de Lisboa ( email )

Raquel M. Gaspar

ISEG and Cemapre/REM, Universidade de Lisboa ( email )

Rua Miguel Lupi, 20
room 510
Lisbon, 1249-078
Portugal

João Beleza Sousa

Instituto Superior de Engenharia de Lisboa (ISEL) ( email )

Rua Emidio Navarro Counselor, 1
Lisbon, 1959-007
Portugal

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