Pricing defaultable bonds under Hawkes jump-diffusion processes

Li Chen, Yong Ma and Weilin Xiao

Finance Research Letters, 2022, vol. 47, issue PB

Abstract: In this paper, we propose a reduced-form model for the embedded credit risk in corporate bonds. We specify the default hazard rate as an affine function of a series of influential variables. To capture the clustering property in some extreme situations, Hawkes jump-diffusion processes are adopted to model the variables. We derive the semi-analytical pricing formula for defaultable bonds. The empirical results from U.S. bond market illustrate the significance of jump clustering when pricing low credit-rating bonds.

Keywords: Defaultable bonds; Affine jump-diffusion; Clustering property; Hawkes processes (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000587

DOI: 10.1016/j.frl.2022.102738

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