KRIS Daily Model Validation: Confirmation That Out-of-Sample KRIS Default Probabilities Accurately Price Traded U.S. Corporate Bonds, Updated June 8, 2021

05/29/2021 03:52 AM

KRIS is the only default probability and fixed income system which provides daily cross-validation between default probabilities, bond price & spread.  KRIS default probability background is given here:
https://www.kamakuraco.com/solutions/kamakura-risk-information-svcs/default-probability-models/

We use the reduced form bond pricing model of Hilscher, Jarrow and van Deventer to price the bonds of every issuer in the U.S. corporate bond market that has at least 2 senior non-call fixed rate bond issues that had trade volume of $1 million or more each:
https://www.kamakuraco.com/wp-content/uploads/2020/12/CouponBondValuation35b.pdf

We compare KRIS bond pricing accuracy to a naïve model based on legacy credit ratings, using the best fitting credit spread levels for each rating grade.  Today’s pricing accuracy comparison is shown below:

The trends in pricing error since September 1, 2017 are shown in this graph:

Finally, the day by day, bond by bond accuracy “win” percentage for KRIS versus ratings is presented here:

For more on the extensive model validation process followed in all aspects of Kamakura Corporation risk management products, please contact us at info@kamakuraco.com.