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Credit Risk and Prepayment Option

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  • Artzner, Philippe
  • Delbaen, Freddy

Abstract

The paper examines a type of insurance contract for which secondary markets do exist: default risk insurance is implicit in corporate bonds and other risky debts. It applies risk neutral martingale measure pricing to evaluate the option for a borrower with default risk, to prepay a fixed rate loan. A simple “matchbox†example is presented with a spreadsheet treatment.

Suggested Citation

  • Artzner, Philippe & Delbaen, Freddy, 1992. "Credit Risk and Prepayment Option," ASTIN Bulletin, Cambridge University Press, vol. 22(1), pages 81-96, May.
    • Handle: RePEc:cup:astinb:v:22:y:1992:i:01:p:81-96_00
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    Cited by:

    1. Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson, "undated". "Measuring Default Risk Premia from Default Swap Rates and EDFs," GSIA Working Papers 2006-E31, Carnegie Mellon University, Tepper School of Business.
    2. Elisa Luciano & Elena Vigna, 2005. "A note on stochastic survival probabilities and their calibration," ICER Working Papers - Applied Mathematics Series 1-2005, ICER - International Centre for Economic Research.
    3. Luciano, Elisa & Spreeuw, Jaap & Vigna, Elena, 2008. "Modelling stochastic mortality for dependent lives," Insurance: Mathematics and Economics, Elsevier, vol. 43(2), pages 234-244, October.
    4. Philipp J. Schonbucher, 1997. "Team Structure Modelling of Defaultable Bonds," FMG Discussion Papers dp272, Financial Markets Group.
    5. Elisa Luciano & Elena Vigna, 2005. "Non mean reverting affine processes for stochastic mortality," ICER Working Papers - Applied Mathematics Series 4-2005, ICER - International Centre for Economic Research.
    6. Pascal François & Sophie Pardo, 2015. "Prepayment risk on callable bonds: theory and test," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(2), pages 147-176, October.
    7. Azizpour, Shahriar & Giesecke, Kay & Kim, Baeho, 2011. "Premia for correlated default risk," Journal of Economic Dynamics and Control, Elsevier, vol. 35(8), pages 1340-1357, August.
    8. Duffie, Darrell, 2005. "Credit risk modeling with affine processes," Journal of Banking & Finance, Elsevier, vol. 29(11), pages 2751-2802, November.
    9. Schonbucher, Philipp, 1997. "Term structure modelling of defaultable bonds," LSE Research Online Documents on Economics 119168, London School of Economics and Political Science, LSE Library.
    10. Christina Nikitopoulos-Sklibosios, 2005. "A Class of Markovian Models for the Term Structure of Interest Rates Under Jump-Diffusions," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2005.
    11. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.

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