Pricing Municipal Investment Bonds with Implicit Government Guarantees: A Fractional Jump–Diffusion Approach_Vol. 2 No. 6 (JSE 2025) _Journal of Statistics and Economics (ISSN: 3005-5733)

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Pricing Municipal Investment Bonds with Implicit Government Guarantees: A Fractional Jump–Diffusion Approach

DOI: https://doi.org/10.62517/jse.202511618

Author(s)

Yan Zhang, Yixiang Tian, Lin Chen*

Affiliation(s)

School of Economics and Management, University of Electronic Science and Technology of China, Chengdu, China * Corresponding Author

Abstract

Over the past decade, local administration financing vehicles (LGFVs) in China have issued a large volume of municipal investment bonds to support infrastructure development and urban expansion. Despite their economic relevance, the credit risk of these bonds is largely shaped by implicit government guarantees, which substantially complicates risk assessment and valuation. Motivated by the presence of strategy persistence in administration asset management and the non-market-driven shocks affecting state-owned enterprise asset values, this paper models state-owned enterprise asset values dynamics using a fractional Brownian motion to capture long-range dependence and a jump–diffusion process to account for abrupt structural interventions. Within a structural credit risk framework, we develop a valuation model for municipal investment bonds that explicitly incorporates an implicit guarantee intensity parameter, and employ the fast Fourier transform (FFT) to obtain efficient numerical solutions. The results indicate that bond prices are positively related to the strength of implicit administration guarantees, yet the relationship is highly nonlinear. When the implicit guarantee intensity is relatively low, bond prices exhibit limited sensitivity to changes in guarantees; however, once the implicit guarantee intensity exceeds a critical threshold, price sensitivity increases markedly. These findings provide a new modeling perspective for pricing corporate bonds with implicit administration backing and contribute to the broader literature on credit risk under state intervention.

Keywords

Municipal Investment Bonds; Implicit Administration Guarantees; Fractional Brownian Motion; Jump–Diffusion Model; Fast Fourier Transform

References

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