Credit risk pricing with both expected and unexpected default

Realdon, Marco

doi:10.1080/17446540600993837

Cited by 7 publications

(17 citation statements)

References 7 publications

(4 reference statements)

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“…It is well known that the Hull-White model can take negative values with very small probability in theory, which is by no means appealing from the financial viewpoint. Nevertheless, the use of Hull-White model is very popular in both academia and industry community since in this case one can obtain a closed-form solution of the securities (see e.g.,Cathcart and El-Jahel [8], Realdon [9], Ballestra et al [11] ).…”

Section: Basic Assumptionsmentioning

confidence: 98%

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Pricing default bonds with dynamic default barrier under the hybrid model

Zhou¹,

Pan²

2016

ams

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In this paper, we present a new pricing model for default bonds with dynamic default barrier under the hybrid model framework. Furthermore, closed-form pricing formulae for default bonds are obtained by using variable transforms and PDE approach, which expand the relevant literature's results. Moreover, several numerical examples are provided to illustrate the effect of the main parameters on the credit spread of a default bond.

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Section: Basic Assumptionsmentioning

confidence: 98%

“…Pricing default securities under the hybrid model are now a popular area of research. One is referred to Cathcart and El-Jahel [8], Realdon [9], Hyong-Chol O [10], Ballestra et al [11]. In this paper, we will price a default bond with dynamic barrier under the hybrid model framework.…”

Section: Introductionmentioning

confidence: 99%

Pricing default bonds with dynamic default barrier under the hybrid model

Zhou¹,

Pan²

2016

ams

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“…This is the shortcoming of the reduced approach. One of the recent trends is to combine both approaches, see for example Cathcart and El-Jahel (2003), Realdon (2006). In Cathcart and El-Jahel (2003) a PDE method is used, providing a semi-analytical pricing formula of defaultable bond combining the two approaches when the short rate follows CIR model and the default intensity is linearly dependent on the short rate.…”

Section: Introductionmentioning

confidence: 99%

Indifference of Defaultable Bonds with Stochastic Intensity models

Houssou,

Besson

2010

Preprint

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The utility-based pricing of defaultable bonds in the case of stochastic intensity models of default risk is discussed. The Hamilton-Jacobi-Bellman (HJB) equations for the value functions is derived. A finite difference method is used to solve this problem. The yield-spreads for both buyer and seller are extracted. The behaviour of the spread curve given the default intensity is analyzed. Finally the impacts of the risk aversion and the correlation coefficient are discussed.

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“…Speaking on default recovery, most of authors including [2,3,4,6,9,12,13] have studied the case of exogenous default recovery which is independent on firm value whereas [1] have studied the case of endogenous recovery which is related to firm value, and [14] studied both cases of exogenous and endogenous recovery.…”

Section: Introductionmentioning

confidence: 99%

“…(See [3,4,6,7,9,12,13,14].) Cathcart et al [6] studied a pricing of corporate bonds in the case when the default intensity is a linear function of the interest rate and gave semi-analytical pricing formulae.…”

Section: Introductionmentioning

confidence: 99%

Integrals of Higher Binary Options and Defaultable Bonds with Discrete Default Information

Hyong-Chol

Kim

et al. 2013

SSRN Journal

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Abstract. In this article, we study the problem of pricing defaultable bond with discrete default intensity and barrier under constant risk free short rate using higher order binary options and their integrals. In our credit risk model, the risk free short rate is a constant and the default event occurs in an expected manner when the firm value reaches a given default barrier at predetermined discrete announcing dates or in an unexpected manner at the first jump time of a Poisson process with given default intensity given by a step function of time variable, respectively. We consider both endogenous and exogenous default recovery. Our pricing problem is derived to a solving problem of inhomogeneous or homogeneous Black-Scholes PDEs with different coefficients and terminal value of binary type in every subinterval between the two adjacent announcing dates. In order to deal with the difference of coefficients in subintervals we use a relation between prices of higher order binaries with different coefficients. In our model, due to the inhomogenous term related to endogenous recovery, our pricing formulae are represented by not only the prices of higher binary options but also the integrals of them. So we consider a special binary option called integral of i-th binary or nothing and then we obtain the pricing formulae of our defaultable corporate bond by using the pricing formulae of higher binary options and integrals of them.

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Credit risk pricing with both expected and unexpected default

Cited by 7 publications

References 7 publications

Pricing default bonds with dynamic default barrier under the hybrid model

Pricing default bonds with dynamic default barrier under the hybrid model

Indifference of Defaultable Bonds with Stochastic Intensity models

Integrals of Higher Binary Options and Defaultable Bonds with Discrete Default Information

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