The estimation of the credit risk of individual local governments

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  • 地方自治体の信用リスク評価
  • チホウ ジチタイ ノ シンヨウ リスク ヒョウカ

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Abstract

The purpose of this study is to estimate the credit risk of individual local governments by the pricing model of municipal bonds issued by local governments to procure necessary capital through a method based on the concept of the straight coupon bond crosssectional market (SCBCSM), a model for the price valuation of corporate bonds proposed by Tsuda (2002,2006). By obtaining credit risk information, such as the probability of default, from the market price of the bonds, this model uses the price fluctuation structure between bonds to estimate the implied default probability. It is assumed that municipal bond defaults will not occur in Japan's local financial system, thanks to a variety of institutions, but since there is no guarantee that debt payments will be made on time, bond prices are believed to be set at levels that reflect the credit risk involved. In this study, we estimated a model for municipal bond price valuation using market price data for municipal bonds issued by prefectures and obtained meaningful information regarding differences in the term structures of implied default probabilities between those prefectures, credit risk rankings by prefecture.

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