Title :
Study on an Affine Structure Model Pricing the Defaultable Coupon Bond
Author :
Mai, Qiang ; Hu, Yun-quan ; An, Shi
Author_Institution :
Sch. of Manage., Harbin Inst. of Technol.
Abstract :
An affine structure model to price defaultable coupon bond with considering the negative correlation between the recovery rate and the default probability is proposed in this paper. By constructing a characteristic function and solving the corresponding Riccati equations, the closed-form solution of the pricing model is gotten. The model also considers the CIR interest rate term structure and adopts the recovery of face value assumption. At last, the result of parameters sensitivity indicates that the proposed model can produce abundant credit spread term structures and that the risk of recovery rate is certainly a systematic risk factor which can bring risk premium
Keywords :
Riccati equations; economic indicators; pricing; probability; risk analysis; CIR interest rate; Riccati equation; affine structure model; characteristic function; closed-form solution; credit spread term structures; default probability; defaultable coupon bond; face value assumption; negative correlation; pricing model; recovery rate; risk premium; systematic risk factor; Bonding; Closed-form solution; Conference management; Cybernetics; Economic indicators; Electronic mail; Engineering management; Hazards; Machine learning; Motion measurement; Pricing; Riccati equations; Stochastic processes; Technology management; Recovery rate; Riccati equations; affine structure model; characteristic function; default probability;
Conference_Titel :
Machine Learning and Cybernetics, 2006 International Conference on
Conference_Location :
Dalian, China
Print_ISBN :
1-4244-0061-9
DOI :
10.1109/ICMLC.2006.258545
