Title: A DISCRETE–TIME APPROACH TO ARBITRAGE-FREE PRICING OF CREDIT DERIVATIVES
Abstract: Quantitative Analysis in Financial Markets, pp. 86-109 (2002) No AccessA DISCRETE–TIME APPROACH TO ARBITRAGE-FREE PRICING OF CREDIT DERIVATIVESSANJIV RANJAN DAS and RANGARAJAN K. SUNDARAMSANJIV RANJAN DASDepartment of Finance, Leavey School of Business, Santa Clara University, Santa Clara, CA 95053-0388, USA and RANGARAJAN K. SUNDARAMNew York University, Stern School of Business, New York, NY 10012, USAhttps://doi.org/10.1142/9789812778451_0004Cited by:2 (Source: Crossref) PreviousNext AboutSectionsPDF/EPUB ToolsAdd to favoritesDownload CitationsTrack CitationsRecommend to Library ShareShare onFacebookTwitterLinked InRedditEmail Abstract: This paper develops a framework for modelling risky debt and valuing credit derivatives that is flexible and simple to implement, and that is, to the maximum extent possible, based on observables. Our approach is based on expanding the Heath–Jarrow–Morton term-structure model to allow for defaultable debt. Rather than follow the procedure of implying out the behavior of spreads from assumptions concerning the default process, we work directly with the evolution of spreads. The risk-neutral drifts in the resulting model possess a recursive representation that facilitates implementation and makes it possible to handle path-dependence and early exercise features without difficulty. The framework permits embedding a variety of specifications for default; we present an empirical example of a default structure which provides promising calibration results. We would like to thank Ed Altman, Dan Chen, Darrell Duffle, Louis Gagnon, Stefan Kassberger, Vellore Kishore, Ken Singleton and participants in seminars at the Kansas City Federal Reserve, the University of Waterloo Credit Risk Conference, Toronto, (both in 1998), Purdue University, and the Risk99 conference, Boston for their comments. We are especially grateful to the editor, Phelim Boyle and two referees for their detailed suggestions on improving the paper's content and presentation. The program code presented in this paper is intended only as pseudo-code and implemented versions may be undertaken at the user's risk. FiguresReferencesRelatedDetailsCited By 2Cited by lists all citing articles based on Crossref citation.Credit Spread Option Pricing by Dynamic CopulasPing Li and Guangdong Huang1 Sep 2010A tree model for pricing credit spread options subject to equity, and market riskRuxing Xu and Shenghong Li1 Aug 2009 Recommended Quantitative Analysis in Financial Markets Metrics History PDF download
Publication Year: 2002
Publication Date: 2002-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
Access and Citation
Cited By Count: 2
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