[Quantlib-users] Corporate bond analytics approach

[Philippe H. <phi...@ex...>]

I am looking to develop a quantitative infrastructure for corporate bonds.
As I see it, there are two ways to proceed as below.
I am asking this group whether my summary of these two options is accurate
or whether there are better approaches?

Approach 1: Simple Interpolated Spread Curve
Under this approach, bond cash flows would be discounted at UST + spread,
from a curve built by shifting a QL UST curve by a bond specific corporate
z-spread. In turn, such corporate z-spread would be interpolated from a
z-spread curve, itself calibrated by a set of benchmark corporate bonds.

Approach 2: CDS / Hazard Rate Curve
This approach would first use existing QL CDS helpers and hazard rate
curves to calibrate such curve to observable CDS quotes. In turn, a
corporate bond could be repriced by adding a "basis" spread on top of the
CDS curve.
However, while QL appears to have a full set of methods and classes for CDS
and hazard rate curves, it doesn't seem to have any analytics or methods to
price corporate bonds on top of a CDS curve as described above

Respective Methods Pros and Cons:
All else equal, I would favor Approach 2 because it allows both bonds and
credit derivatives to be priced and risk managed, as CDS curves are
conveniently available on standardized IMM dates. However, that requires
the layer of corporate bond analytics and classes on top of a hazard curve
that I do not believe exists in QL.

I am probably missing something, so most curious about what QL users think
about this particular problem?



Philippe Hatstadt

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