The Compensation Model for Default-Risk of Corporate Bonds in China under Kalman Filter

The default compensation of corporate bonds is a significant part of risk management. In this research, algorithm of the Kalman filter is applied in modeling of jump-risk compensation. Default probability and default intensity are two important variables for the jump-risk compensation. In the modeling process, the parameter method of maximum likelihood estimation is used to obtain the default probability, and the default intensity under real measure is transformed into default intensity under equivalent martingale measure, which could be obtained from the differential equations under the equivalent martingale measure. The compensation model is established by solving the default probability function.