Assessing the Value of Implicit Government Guarantees in State-Owned Enterprise Bonds: Insights from Credit Default Swaps

Abstract

Accurately pricing the impact of implicit government guarantees on SOE bonds is crucial for ensuring their reasonable valuation. In this paper, we conceptualize the implicit government guarantee effect as a credit default swap (CDS) implicitly sold by the government and develop a pricing framework based on the transaction mechanism of CDS. Specifically, we construct a structural pricing model that incorporates the probability of government intervention conditional on default. Using numerical simulation under different default intensities and government intervention probabilities, we quantify the value of the implicit government guarantee effect. The simulation results show that, as the credit risk of SOE bonds increases, the value of the implicit government guarantee effect rises correspondingly. Moreover, the price of government intervention exhibits a complex nonlinear relationship with both default intensity and the government’s willingness to provide implicit guarantees. Overall, this study establishes an internal pricing mechanism through numerical simulations to explain how implicit government guarantees affect the credit risk of SOE bonds.