Defaultable Bonds via HKA
Computational Finance
2011-03-24 v1
Abstract
To construct a no-arbitrage defaultable bond market, we work on the state price density framework. Using the heat kernel approach (HKA for short) with the killing of a Markov process, we construct a single defaultable bond market that enables an explicit expression of a defaultable bond and credit spread under quadratic Gaussian settings. Some simulation results show that the model is not only tractable but realistic.
Cite
@article{arxiv.1103.4541,
title = {Defaultable Bonds via HKA},
author = {Yuta Inoue and Takahiro Tsuchiya},
journal= {arXiv preprint arXiv:1103.4541},
year = {2011}
}