AN EXTENSION OF THE BRODY–HUGHSTON–MACRINA APPROACH TO MODELING OF DEFAULTABLE BONDS

Marek Rutkowski () and Nannan Yu
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Marek Rutkowski: School of Mathematics, University of New South Wales, Sydney, NSW 2052, Australia
Nannan Yu: School of Mathematics, University of New South Wales, Sydney, NSW 2052, Australia

International Journal of Theoretical and Applied Finance (IJTAF), 2007, vol. 10, issue 03, 557-589

Abstract: The innovative information-based framework for credit risk modeling, proposed recently by Brody, Hughston, and Macrina, is extended to a more general and practically important setup of random interest rates. We first introduce the market model, and we derive an explicit expression for defaultable bond price. Next, the dynamics of the information process and dynamics of defaultable bond are found for both deterministic and random interest rates. Finally, the valuation and hedging of derivative securities are briefly examined. In particular, the valuation formula for a European option on a defaultable bond is established.

Keywords: Credit risk; term structure; defaultable bond (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S0219024907004263

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