Credit Spread Option Valuation under GARCH
Ecole des Hautes Etudes Commerciales de Montreal- from Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques.
This paper develops closed-form solutions for options on credit spreads with GARCH models. We extend the mean-reverting model proposed in Longstaff and Schwartz (1995) and we use the Heston and Nandi's (1999) GARCH specification rather than the traditional lognormal. Our model, being more flexible, captures better the empirical properties of observed credit spreads and contains Longstaff and Schwartz (1995) model as a special case. GARCH coefficients are estimated using spread levels for corporate bonds.
Keywords: CREDIT; MODELS; RISK (search for similar items in EconPapers)
JEL-codes: E51 E59 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:etcori:00-07
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