Variance Gamma Model in Determining the Default Probability of Coupon Bond Issuing Company

Hoyyi, A. and Abdurakhman, Abdurakhman and Rosadi, D. (2024) Variance Gamma Model in Determining the Default Probability of Coupon Bond Issuing Company. IAENG International Journal of Applied Mathematics, 54 (5). pp. 961-968. ISSN 19929978

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Abstract

Bond is one of the most attractive financial instruments for both investors in the capital market and companies seeking funds for benefit. Investing in bonds often yields fixed income through coupons and also exposes investors to investment risk, such as credit risk. This credit risk encompasses the potential loss arising from a failure to meet credit payment obligations upon maturity, leading to a declaration of default. To proactively address this issue, there is a need to calculate the default probability of a company in order to gain insights into the entire default potential. Previous studies had predominantly employed bond models that assumed ln returns on assets follow a normal distribution. However, real-world ln returns on traded assets exhibited characteristics including excess kurtosis and heavy tails, which diverged from the assumptions of a normal distribution. The models developed on this assumption did not accurately reflect the nature of the data. In order to bridge this gap, this study aimed to introduce a novel approach for gauging default probability through the use of the Variance Gamma model. The chi-square test is used to determine goodness of fit. The Variance Gamma parameter estimation used Maximum Likelihood Estimation (MLE), with the initial value being the outcome of parameter estimation through the moment method. This approach assessed default probability in the context of both one-period and two-period coupon value payments. ©

Item Type: Article
Uncontrolled Keywords: bond; coupon; default probability; Variance Gamma
Subjects: Q Science > QA Mathematics
Divisions: Faculty of Mathematics and Natural Sciences > Mathematics Department
Depositing User: Ismu WIDARTO
Date Deposited: 26 Jun 2025 03:49
Last Modified: 26 Jun 2025 03:49
URI: https://ir.lib.ugm.ac.id/id/eprint/19313

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