Asymptotic approximation of the hitting-time and evaluation of a risky bond

Ahmed Loulit ()

No 04-029.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: In this paper, we give an approximation for the density of the first–passage time through a boundary defined by smooth function S(t). The density is a solution of some Voltera integral and admits an expansion of the Neumann-type series, and the error term converges rapidly to zero. We examine the case of a non homogeneous-time Brownian diffusion which is related to the evaluation of many claims on financial asset. An application to the approximated valuation of risky bonds and options on the asset of levered firm is provided.

Keywords: hitting-time; Brownian diffusion; levered firm. (search for similar items in EconPapers)
JEL-codes: C40 G12 (search for similar items in EconPapers)
Pages: 25 p.
Date: 2004
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