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Pricing credit spread option with Longstaff-Schwartz and GARCH models in Chinese bond market

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Abstract

This paper investigates the mean-reversion and volatile of credit spread time series by using regression and time series analysis in Chinese bond market. Then the Longstaff-Schwartz model and GARCH model are applied to price credit spread put option. The authors compare the features of these two models by employing daily bond prices of government bonds and corporate bonds for the period 2010–2012 in Chinese bond market. The proposed results show that the higher the credit ratings of the corporate bonds are, the lower the prices of the credit spread options are.

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Authors and Affiliations

  1. School of Economics and Management, Beijing University of Chemical Technology, Beijing, 100029, China

    Rongxi Zhou & Sinan Du

  2. Research Center for Applied Finance, School of Finance and Banking, University of International Business and Economics, Beijing, 100029, China

    Mei Yu

  3. School of Science, Beijing University of Chemical Technology, Beijing, 100029, China

    Fengmei Yang

Authors
  1. Rongxi Zhou
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  2. Sinan Du
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  3. Mei Yu
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  4. Fengmei Yang
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Corresponding author

Correspondence to Fengmei Yang.

Additional information

This research was supported by the National Natural Science Foundation of China under Grant Nos. 71171012 and 70901019, and Humanity and Social Science Foundation of Ministry of Education of China under Grant No. 14YJA790075.

This paper was recommended for publication by Editor WANG Shouyang.

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Zhou, R., Du, S., Yu, M. et al. Pricing credit spread option with Longstaff-Schwartz and GARCH models in Chinese bond market. J Syst Sci Complex 28, 1363–1373 (2015). https://doi.org/10.1007/s11424-015-3147-8

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  • DOI: https://doi.org/10.1007/s11424-015-3147-8

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