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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Main Authors:	Beom Jin Kim, Chan Yeol Park, Yong-Ki Ma
Format:	Article
Language:	English
Published:	Hindawi Limited 2014-01-01
Series:	Journal of Applied Mathematics
Online Access:	http://dx.doi.org/10.1155/2014/968065

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spelling	doaj-2ae59cf9c2df43c89a2798351a54fa082020-11-24T20:51:01ZengHindawi LimitedJournal 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
collection	DOAJ
language	English
format	Article
sources	DOAJ
author	Beom Jin Kim Chan Yeol Park Yong-Ki Ma
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
author_facet	Beom Jin Kim Chan Yeol Park Yong-Ki Ma
author_sort	Beom Jin Kim
title	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_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_sort	valuation of credit derivatives with multiple time scales in the intensity model
publisher	Hindawi Limited
series	Journal of Applied Mathematics
issn	1110-757X 1687-0042
publishDate	2014-01-01
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.
url	http://dx.doi.org/10.1155/2014/968065
work_keys_str_mv	AT beomjinkim valuationofcreditderivativeswithmultipletimescalesintheintensitymodel AT chanyeolpark valuationofcreditderivativeswithmultipletimescalesintheintensitymodel AT yongkima valuationofcreditderivativeswithmultipletimescalesintheintensitymodel
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Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model

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