2011/03/23 by Yuta Inoue, Yūta Inoue, Inoue, Yuta +2
Economics, Econometrics and Finance · #Credit Risk and Financial Regulations #Economic theories and models #Stochastic processes and financial applications #msc:91G40 #q-fin.CP
paper · pdf · doi:10.48550/arxiv.1103.4541
arxiv created 2011/03/23 · arxiv updated 2011/03/24
To construct a no-arbitrage defaultable bond market, we work on the state price density framework. Using the heat kernel approach (HKA for short) with the killing of a Markov process, we construct a single defaultable bond market that enables an explicit expression of a defaultable bond and credit spread under quadratic Gaussian settings. Some simulation results show that the model is not only tractable but realistic.