Utility indifference valuation of corporate bond with credit rating migration by structure approach

Jin Liang, Yuejuan Zhao and Xudan Zhang

Economic Modelling, 2016, vol. 54, issue C, 339-346

Abstract: An indifference pricing model for corporate bond with rating migration risk is established in this article. Under the structural framework, the credit rating migration is modeled by the first attempt in an incomplete market, so far as we know. The model results in a HJB system. With the help of the dynamic programming theory, a closed form solution is derived by imposing a condition on the credit rating migration boundary. With the explicit migration boundary and closed form solution, the model is easy to be applied in practice. Based on the pricing formula, the impacts of the parameters on the indifference price are analyzed and relative financial explanations are discussed.

Keywords: Structural model; Credit rating migration; Utility indifference valuation; HJB equation system (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:54:y:2016:i:c:p:339-346

DOI: 10.1016/j.econmod.2015.12.002

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