Defaultable Security Valuation and Model Risk

Aydin Akgun,
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Aydin Akgun,: University of Lausanne and FAME

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: The aim of the paper is to analyse the effects of different model specifications, within a general nested framework, on the valuation of defaultable bonds, and some credit derivatives. Assuming that the primitive variables such as the risk-free short rate, and the credit spread are affine functions of a set state variables following jump-diffusion processes, efficient numerical solutions for the prices of several defaultable securities are provided. The framework is flexible enough to permit some degree of freedom in specifying the interrelation among the primitive variables. It also allows a richer economic interpretation for the default process. The model is calibrated, and a sensitivity analysis is conducted with respect to parameters defining jump terms, and correlation. The effectiveness of dynamic hedging strategies are analysed as well.

JEL-codes: G13 G19 (search for similar items in EconPapers)
Date: 2001-03
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Citations: View citations in EconPapers (2)

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