A statistical modeling methodology for the analysis of term structure of credit risk and its dependency

•We model credit risk term structure and it dependency between industry.•Our statistical modeling procedure is carried out without specifying the model likelihood explicitly.•We investigate the effects of recent subprime financial crisis on Japanese bond market.

This paper presents a statistical modeling methodology for simultaneous estimation of the term structure for the risk-free interest rate, hazard rate, loss given default as well as credit risk dependency structure between bond-issuing industries. A model like this provides a realistic view for the market anticipation of credit risk for corporate bonds and the flexibility in capturing credit risk dependency between industries. Our statistical modeling procedure is carried out without specifying the model likelihood explicitly, and thus robust to the model mis-specification. An empirical analysis is conducted using the financial information on the Japanese bond market data. Numerical results confirm the practicality of the proposed methodology.