Pricing Corporate Bonds with Credit Risk, Liquidity Risk, and Their Correlation

Table 1

Estimated coefficients for the Markov-switching model.

	C		Expected duration	Transition probabilities
				State1	State2
State1	2.008 (0.00)	0.008 (0.00)	131.92	0.99 (0.00)	0.06 (0.32)
State2	4.582 (0.00)	0.011 (0.00)	17.32	0.01 (0.32)	0.94 (0.00>)

Note. This table provides the estimated coefficients for the Markov-switching model:+, where represents different states. We rely on the transaction records in Bloomberg for the sample period from January 2006 to December 2018. The liquidity risk is proxied by proposed by Bao etal. [41], based on the bond price trading deviation theory, to make a comparative study. The credit risk is proxied by the current S&P rating, and all ratings are assigned a number to facilitate the analysis; for example, 22 refers to a D rating, … and 1 refers to AAA. The first two columns show the values of and for the two regimes, where the second row of each regression result reports the p-values for the HAC statistics calculated by Newey–West standard errors. indicates the significance at the 1% level. The third column is the expected duration of each regime. The last two columns report the transition probabilities between different states and the corresponding p-values for HAC statistics calculated by Newey–West standard errors.