Theoretical and empirical investigation of rational and irrational leraning effects on bond prices and CDS

2015 Fiscal Year Final Research Report

• Project/Area Number: 24530351
• Research Category: Grant-in-Aid for Scientific Research (C)
• Allocation Type: Multi-year Fund
• Section: 一般
• Research Field: Public finance/Monetary economics
• Research Institution: Hiroshima University
• Principal Investigator: Ono Sadayuki 広島大学, 社会(科)学研究科, 准教授 (80602002)
• Project Period (FY): 2012-04-01 – 2016-03-31
• Keywords: 債券価格 / ＣＤＳ / 学習効果

Outline of Final Research Achievements

This study conducts theoretical and empirical investigation on bond prices and Credit Dafault Swap(CDS) spreads, taking into account of learning effects. The expected growth rates of economic fundamentals cannot be accurately observed due to the incomplete information. As a result, the investor needs to learn or evaluate them. Two learning methods are applied to the model. One is the rational Bayesian learning, and the other is irrational such as conservative, representative, optimistic, and pessimistic learnings.

The model shows that mean reversion of the return volatility of defautable bonds, which is observed by data, can be explained by the time variation of the learning effects. Moreover, credit spreads obtained from the model with a reasonable value of relative risk aversion are close to values observed in the US credit market. However, the model-implied CDS spreads show somewhat smaller values compared to the data.

Free Research Field

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