Anisotropic Credit Scheme for Municipal Revenue Bonds

Abstract

The author presents an original scheme to assess the creditworthiness of municipal revenue bonds and to track their credit progress before maturity. Prior studies have attempted to solve this matter from observed yield spreads of municipal bonds over riskless Treasury debt. In this article, the author assembles an analytical approach to directly appraise default probabilities from the prescheduled milestones and the feasible credit events of the underlying funded project. He derives various merits of the anisotropic random walk as the basic framework of his analysis and demonstrates them over a genuine scenario. The proposed model assists municipal investors as well as external and internal raters.

TOPICS: Fixed-income portfolio management, credit risk management, factor-based models