The nature of defaultable bond pricing diversification

A new approach highlighting the close connection in bond pricing between the investor's preference and belief has been proposed. It tries to interpret the nature of defaultable bond pricing diversification. Firstly, features of investor's preference are investigated in model, two factors of investment portfolio strategy and dummy default time are proved to have strongpoint to depict investor's preference. By integrating the two factors, a function is designed to search the dominant cultural preference of investors. A simulation example is used to verify the effectiveness of the model. Secondly, the heterogeneity among issuers is considered in bond offering competition. Heterogeneity makes issuers pay off different offering cost in social choice implementation. A signaling game model is constructed to describe the implementation and gives the precise solution of signal cost that makes a separating equilibrium exist. The existence of separating equilibrium in investor's belief will make the pricing diversified by issuer's signaling cost. The approach sets up a span-new frame for studying bond pricing in competitive bond offering market.