A tractable LIBOR model with default risk

Zorana Grbac and Antonis Papapantoleon

Papers from arXiv.org

Abstract: We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.

Date: 2012-02, Revised 2012-10
New Economics Papers: this item is included in nep-bec, nep-rmg and nep-upt
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Published in Mathematics and Financial Economics 2013, Vol 7, No 2, 203-227

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1202.0587

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