Analytical Pricing of Defaultable Bond with Stochastic Default Intensity
Abstract
We provide analytical pricing formula of corporate defaultable bond with both expected and unexpected default in the case with stochastic default intensity. In the case with constant short rate and exogenous default recovery using PDE method, we gave some pricing formula of the defaultable bond under the conditions that 1)expected default recovery is the same with unexpected default recovery; 2) default intensity follows one of 3 special cases of Willmott model; 3) default intensity is uncorrelated with firm value. Then we derived a pricing formula of a credit default swap. And in the case of stochastic short rate and exogenous default recovery using PDE method, we gave some pricing formula of the defaultable bond under the conditions that 1) expected default recovery is the same with unexpected default recovery; 2) the short rate follows Vasicek model; 3) default intensity follows one of 3 special cases of Willmott model; 4) default intensity is uncorrelated with firm value; 5) default intensity is uncorrelated with short rate. Then we derived a pricing formula of a credit default swap. We give some credit spread analysis, too.
Cite
@article{arxiv.1303.1298,
title = {Analytical Pricing of Defaultable Bond with Stochastic Default Intensity},
author = {Hyong-Chol O and Ning Wan},
journal= {arXiv preprint arXiv:1303.1298},
year = {2013}
}
Comments
35 pages, 6 figures; written in working paper series in 2005, version 3 added references with crossref and revised introduction