Assessment of the Functional Relationship between the Yield Spread and the Default Spread

Abstract

The paper examines one of the conceptual issues of financial management – the question of the optimal ratio of the magnitude of the risk and the volume of profitability covering this risk. A parametric relationship is proposed and statistically confirmed between the yield spread of corporate bonds that have a greater credit risk than risk-free instruments and the default spread characterizing the measure of credit risk. The research topic is becoming particularly relevant for the Russian market at the moment, because as a result of the dynamic development in recent years of both the corporate bond market and the rating industry in Russia, has become available database of assigned ratings, historical data on the frequency of defaults of issuers and recovery rates RR, sufficient for conducting research. This made it possible to generate some statistics on the Russian market and to link the issuer rating level with the probability of default of PD, to give a quantitative risk assessment using one of the models of the Basel Recommendations. In the empirical part of the work, the maximum spread Gmax for this market is calculated, over which the investor risks more than covers the profitability spread. The optimal risk / return ratio is determined at the point of efficiency coefficient maximum K_ef