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http://hdl.handle.net/2451/26910
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| Title: | Pricing Credit Derivatives with Rating Transitions |
| Authors: | Acharya, Viral V.
Das, Sanjiv Ranjan
Sundaram, Rangarajan K. |
| Keywords: | Risky Debt
Rating Transitions
Credit Derivatives
Cresdit Senstive Note
HJM Model |
| Issue Date: | 5-Nov-2001 |
| Series/Report no.: | S-DRP-01-17 |
| Abstract: | We develop a model for pricing risky debt and valuing credit derivatives
that is easily calibrated to existing variables. Our approach is based
on expanding the Das and Sundaram (2000) extension of the
Heath-Jarrow-Morton (1990) term-structure model to allow for multiple
ratings classes of debt. The framework has two salient features: (i) it
employs a ratings transition matrix as the driver or the default
process, and (ii) the entire set of rating categories is calibrated
jointly, allowing arbitrage-free restrictions across rating classes, as
a bond migrates amongst them. We provide an illustration of the approach
by applying it to price credit-sensitive notes that have coupon payments
that are linked to the rating of the underlying credit. |
| URI: | http://hdl.handle.net/2451/26910 |
| Appears in Collections: | Derivatives Research
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