On a variational formulation used in credit risk modeling

Graziella Pacelli () and Luca Vincenzo Ballestra

Finance Research Letters, 2010, vol. 7, issue 2, 110-118

Abstract: We consider the credit risk model of Collin-Dufresne and Goldstein (2001). According to this model, the price of a defaultable bond can be efficiently computed using a variational formulation that consists of an integral relation and a Volterra integral equation. In Collin-Dufresne and Goldstein (2001) this integral equation is justified by a probabilistic intuition, but is not proven formally. In this paper we analytically derive the variational formulation used in Collin-Dufresne and Goldstein (2001). This analysis allows to give a correct characterization of the solution of the integral equation. Furthermore the approach proposed in this paper could also be employed for other models of credit risk.

Keywords: Credit; risk; Integral; equation; First-passage; model (search for similar items in EconPapers)
Date: 2010
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:7:y:2010:i:2:p:110-118

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