Estimating Implied Default Probabilities and Risk Measures for Credit Bonds

This paper implements the reduced form approach to model the credit risk term structure of the 16 SIAS fixed income portfolio's debt issuers. The major advantage of reduced form model risk measures is that they explicitly take the default risk and recovery rate into consideration. The default-risk-adjusted duration and convexity will be smaller than the traditional measures because of the possibility of receiving the recovery value. By analyzing the credit risk term structure, we can observe the time-varying pattern in market's expectation on the issuer's ability to fulfill its debt obligation. Discrepancy between bonds' rating and their implied default probability is also observed.