Comparison of JGB and Bank Debenture Credit Spread Models

Abstract

With the rapidly growing corporate bond market in Japan, the demand is increasing for the management of both interest rate risk and credit risk, the pricing of corporate bonds, and the valuation of credit derivatives. We provide a methodology by which to choose appropriate models describing the interest rate process and the credit spread process simultaneously through an extension of the Chan, Karolyi, Longstaff, and Sanders approach.