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Assessment of Credit Risk Models on Rule 144A Corporate Bonds

Mark Johnson, Karyl Leggio and Yoon S. Shin
The Journal of Fixed Income Fall 2018, 28 (2) 65-83; DOI: https://doi.org/10.3905/jfi.2018.1.064
Mark Johnson
is an associate professor of finance at Loyola University Maryland in Baltimore, MD
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Karyl Leggio
is a professor of finance at Loyola University Maryland in Baltimore, MD
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Yoon S. Shin
is an associate professor of finance at Loyola University Maryland in Baltimore, MD
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Abstract

Accurate assessment of credit risk can improve the performance of bond portfolio managers. Using credit ratings and market-based credit risk models from S&P and Bloomberg, we investigate the performance of four credit risk models in the Rule 144A corporate bond markets in the United States over the 1990–2015 period. The authors divide their sample into straight bonds and convertible bonds and find that (1) when it comes to straight bonds, discrete models such as S&P’s credit ratings and Bloomberg ratings determine yields more accurately than the continuous market-based models of S&P and Bloomberg; (2) with regard to convertible bonds, a convertible option has a stronger effect than credit ratings in determining yields, and only Bloomberg default risk ratings, not S&P credit ratings, determine the yields; (3) for convertible bonds, the continuous market-based models of S&P and Bloomberg affect yields more significantly than discrete models; and (4) when it comes to predicting actual defaults, Bloomberg models are superior to S&P’s models, and the Bloomberg discrete model has more power than its continuous counterpart.

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The Journal of Fixed Income: 28 (2)
The Journal of Fixed Income
Vol. 28, Issue 2
Fall 2018
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Assessment of Credit Risk Models on Rule 144A Corporate Bonds
Mark Johnson, Karyl Leggio, Yoon S. Shin
The Journal of Fixed Income Sep 2018, 28 (2) 65-83; DOI: 10.3905/jfi.2018.1.064

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Assessment of Credit Risk Models on Rule 144A Corporate Bonds
Mark Johnson, Karyl Leggio, Yoon S. Shin
The Journal of Fixed Income Sep 2018, 28 (2) 65-83; DOI: 10.3905/jfi.2018.1.064
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