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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26865
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| Title: | A Direct Approach to Arbitrage-Free Pricing of Credit Derivatives1 |
| Authors: | Das, Sanjiv Ranjan
Sundaram, Rangarajan K. |
| Issue Date: | Nov-1998 |
| Series/Report no.: | FIN-99-013 |
| Abstract: | This paper develops a framework for modelling risky debt and valuing
credit derivatives that is exible and simple to implement, and that is,
to the maximum extent possible, based on observables. Our approach is
based on expanding the Heath-Jarrow-Morton term-structure model to allow
for defaultable debt. We do not follow the procedure of implying out the
behavior of spreads from assumptions concerning the default process,
instead working directly with the evolution of spreads. We show that
risk-neutral drifts in the resulting model possess a recursive
representation that particularly facilitates implementation and makes it
possible to handle path-dependence and early exercise features without
difficulty. The framework permits embedding a variety of specifications
for default; we present an empirical example of a default structure
which provides promising calibration results. |
| URI: | http://hdl.handle.net/2451/26865 |
| Appears in Collections: | Finance Working Papers
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