A tractable LIBOR model with default risk
Pricing of Securities
2013-07-15 v3 Probability
Abstract
We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.
Cite
@article{arxiv.1202.0587,
title = {A tractable LIBOR model with default risk},
author = {Zorana Grbac and Antonis Papapantoleon},
journal= {arXiv preprint arXiv:1202.0587},
year = {2013}
}
Comments
26 pages. Forthcoming in Mathematics and Financial Economics