Structural Model and Empirical Analysis of Bond Pricing in Government Implicit Guarantee

Abstract:

In this paper， the idea of fuzzy sets was embedded into a structural model of bond pricing， in which government implicit guarantee was regarded as a parameter. A closed-form formula for bond pricing was obtain by using the PDE（partial differential equations） methods. With the formula in hand， an empirical analysis was implemented to estimate the probability of government implicit guarantee by using different types of corporate bonds data. The fraction of the firm’s value lost in bankruptcy was first estimated by combing the historical data of bonds issued by private enterprises using the least square method. The function of government implicit guarantee was then analyzed by using the data of bonds issued by local and central state-owned enterprises. Three results were obtained. First， the probability of government implicit guarantee is higher for bonds issued by central state-owned enterprises than those issued by local state-owned enterprises. Next， as the credit rating increases， the probability of government implicitly guarantee increases. Finally， the probability of government implicit guarantee in developed regions is higher than that in undeveloped regions.

Key words:bond pricing formula;structural default model;government implicit guarantee;credit rating;empirical analysis