A GENERAL FRAMEWORK FOR HIGH YIELD BOND INVESTMENT

Ralf Korn () and Helen Kovilyanskaya ()
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Ralf Korn: Department of Mathematics, TU Kaiserslautern, Erwin Schrödinger Str. and Fraunhofer ITWM, Fraunhofer Platz 1, Kaiserslautern, 67663, Germany
Helen Kovilyanskaya: Mathematisches Institut, HHU Düsseldorf, Universitätstr. 1, Düsseldorf, 40225, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 06, 967-984

Abstract: We present a general framework for considering investment in defaultable securities which — as special cases — includes both the firm value and the intensity based approach to credit risky bonds. In this framework, we construct a dynamically evolving portfolio of high-yield bonds where whenever a bond defaults it is replaced by another high yield bond. The properties of this portfolio and in particular the evolution of its face value are investigated. The modeling potential of our framework is demonstrated via examples of bond portfolios admitting extreme properties such as an unbounded face value process.

Keywords: High yield bond investment; defaultable bond modeling; face value process (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1142/S0219024907004512

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