Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model
We propose approximate solutions for pricing zero-coupon defaultable bonds, credit default swap rates, and bond options based on the averaging principle of stochastic differential equations. We consider the intensity-based defaultable bond, where the volatility of the default intensity is driven by...
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| Format: | Article |
| Language: | English |
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Wiley
2014-01-01
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| Series: | Journal of Applied Mathematics |
| Online Access: | http://dx.doi.org/10.1155/2014/968065 |
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| _version_ | 1832549494549381120 |
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| author | Beom Jin Kim Chan Yeol Park Yong-Ki Ma |
| author_facet | Beom Jin Kim Chan Yeol Park Yong-Ki Ma |
| author_sort | Beom Jin Kim |
| collection | DOAJ |
| description | We propose approximate solutions for pricing zero-coupon defaultable bonds, credit default swap rates, and bond options based on the averaging principle of stochastic differential equations. We consider the intensity-based defaultable bond, where the volatility of the default intensity is driven by multiple time scales. Small corrections are computed using regular and singular perturbations to the intensity of default. The effectiveness of these corrections is tested on the bond price and yield curve by investigating the behavior of the time scales with respect to the relevant parameters. |
| format | Article |
| id | doaj-art-2ae59cf9c2df43c89a2798351a54fa08 |
| institution | Kabale University |
| issn | 1110-757X 1687-0042 |
| language | English |
| publishDate | 2014-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Journal of Applied Mathematics |
| spelling | doaj-art-2ae59cf9c2df43c89a2798351a54fa082025-02-03T06:11:12ZengWileyJournal of Applied Mathematics1110-757X1687-00422014-01-01201410.1155/2014/968065968065Valuation of Credit Derivatives with Multiple Time Scales in the Intensity ModelBeom Jin Kim0Chan Yeol Park1Yong-Ki Ma2Department of Mathematics, Yonsei University, Seoul 120-749, Republic of Korea Korea Institute of Science and Technology Information (KISTI), 245 Daehak-ro, Yuseong-gu, Daejeon 305-806, Republic of KoreaDepartment of Applied Mathematics, Kongju National University, Chungcheongnam-do 314-701, Republic of KoreaWe propose approximate solutions for pricing zero-coupon defaultable bonds, credit default swap rates, and bond options based on the averaging principle of stochastic differential equations. We consider the intensity-based defaultable bond, where the volatility of the default intensity is driven by multiple time scales. Small corrections are computed using regular and singular perturbations to the intensity of default. The effectiveness of these corrections is tested on the bond price and yield curve by investigating the behavior of the time scales with respect to the relevant parameters.http://dx.doi.org/10.1155/2014/968065 |
| spellingShingle | Beom Jin Kim Chan Yeol Park Yong-Ki Ma Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model Journal of Applied Mathematics |
| title | Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model |
| title_full | Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model |
| title_fullStr | Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model |
| title_full_unstemmed | Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model |
| title_short | Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model |
| title_sort | valuation of credit derivatives with multiple time scales in the intensity model |
| url | http://dx.doi.org/10.1155/2014/968065 |
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