Double free boundary problem for defaultable corporate bond with credit rating migration risks and their asymptotic behaviors

Yuchao Dong, Jin Liang and Claude-Michel Brauner

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Abstract: In this work, a pricing model for a defaultable corporate bond with credit rating migration risk is established. The model turns out to be a free boundary problem with two free boundaries. The latter are the level sets of the solution but of different kinds. One is from the discontinuous second order term, the other from the obstacle. Existence, uniqueness, and regularity of the solution are obtained. We also prove that two free boundaries are $C^\infty$. The asymptotic behavior of the solution is also considered: we show that it converges to a traveling wave solution when time goes to infinity. Moreover, numerical results are presented.

Date: 2023-01, Revised 2023-07
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