Year: 2025
Type: article
Abstract: Credit-linked notes (CLNs) are vital for transferring and diversifying credit risks in asset securitization, yet their application in China remains limited despite policy support. This paper optimizes China’s CLN pricing mechanism by developing the structured model incorporating the dynamic default boundary and the probability of government implicit guarantees. The model transforms the pricing problem into a semi-unbounded problem via partial differential methods, yielding an explicit pricing solution through Poisson’s formula. Empirical analysis reveals that government implicit guarantees are observed in systemically important institutions in the domestic CLN market and significantly reduce credit risk premiums, with Monte Carlo simulations indicating an approximately positive linear correlation between guarantee probability and CLN prices. Our results demonstrate the dual impact of implicit guarantees—lowering risk premiums while potentially hindering market discipline. This research advances China’s credit derivative pricing theory, offering institutions a pricing tool and further providing policy and practical suggestions for regulatory authorities.
Source: Mathematics
DOI: 10.3390/math13152398
Authors: Xinghui Wang, Xiaosong Qian
Institution: Soochow University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: gold
Estimated APC paid: $3,137
Award: G5933003684
OpenAlex ID: W4413095779