Asymptotic Expansion for Term Structures of Defaultable Bonds with Non-Gaussian Dependent Innovations

Masakazu Miura, Kenichiro Tamaki and Takayuki Shiohama ()

Asia-Pacific Financial Markets, 2013, vol. 20, issue 4, 344 pages

Abstract: In the context of credit risk, the term structure models that have been studied in the literature are typically models driven by Brownian motion or standard jump diffusions. These models provide coherent modeling that is straightforward to implement. To make these models more flexible, we develop a discrete-time approximation of a continuous-time Vasicek term structure analysis with non-Gaussian and dependent innovations. Higher-order asymptotic theory enables us to evaluate the term structures of defaultable bonds. Numerical examples show that the effects of non-Gaussianity and the dependency of both risk-free rate and default process strongly influence the evaluation of defaultable bonds. As an application, we estimate the parameters of our proposed models for the Japanese corporate credit default swap market. Copyright Springer Science+Business Media New York 2013

Keywords: Credit risk; Edgeworth expansion; Short rates; Term structure; Vasicek model (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10690-013-9169-0

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