Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility

Carl Chiarella, Samuel Chege Maina and Christina Nikitopoulos-Sklibosios (christina.nikitopoulos@uts.edu.au)

No 283, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper presents a class of defaultable term structure models within the HJM framework with stochastic volatility. Under certain volatility specifications, the model admits finite dimensional Markovian structures and consequently provides tractable solutions for interest rate derivatives. We also investigate the effect of stochastic volatility and of correlation between the stochastic volatility and credit spreads on the defaultable short rate and defaultable bond prices.

Keywords: Stochastic volatility; Heath-Jarrow-Morton model; defaultable forward rates; credit spreads (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-08-01
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (9)

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