Higher Order Binaries with Time Dependent Coefficients and Two Factors - Model for Defaultable Bond with Discrete Default Information

Hyong-Chol O, Yong-Gon Kim and Dong-Hyok Kim

Papers from arXiv.org

Abstract: In this article, we consider a 2 factors-model for pricing defaultable bond with discrete default intensity and barrier where the 2 factors are stochastic risk free short rate process and firm value process. We assume that the default event occurs in an expected manner when the firm value reaches a given default barrier at predetermined discrete announcing dates or in an unexpected manner at the first jump time of a Poisson process with given default intensity given by a step function of time variable. Then our pricing model is given by a solving problem of several linear PDEs with variable coefficients and terminal value of binary type in every subinterval between the two adjacent announcing dates. Our main approach is to use higher order binaries. We first provide the pricing formulae of higher order binaries with time dependent coefficients and consider their integrals on the last expiry date variable. Then using the pricing formulae of higher binary options and their integrals, we give the pricing formulae of defaultable bonds in both cases of exogenous and endogenous default recoveries and credit spread analysis.

Date: 2013-05, Revised 2013-06
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://arxiv.org/pdf/1305.6868 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1305.6868

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().