A Case Study on Reduced Form Credit Risk Models

This is a case study on the credit risk models, introduced by Cetin et al. (2004) and Guo et al. (2009). Empirical analyses are focused on the pricing of zero-coupon bonds issued by two US industrial companies, the Coca-Cola Company and PepsiCo Inc. Applying market observed information, simulations of some related variables are performed, and then the future zero-coupon bond prices for each discussed model are generated. The results indicate that during the financial tsunami influence period, due to the fact that the former model, i.e., Jarrow04, considers bond publisher's cash reserves and immediately responds to market information, better predictions are obtained from it. However, in the period after the financial crisis, the latter model, i.e., Jarrow09, performs better for pricing a long-term zero-coupon bond, while for a short-term bond, the former performs slightly better