Defaultable Bonds via HKA

Yuta Inoue and Takahiro Tsuchiya

Papers from arXiv.org

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.

Date: 2011-03
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