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Utility indifference valuation of corporate bond with credit rating migration by structure approach

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  • Liang, Jin
  • Zhao, Yuejuan
  • Zhang, Xudan

Abstract

An indifference pricing model for corporate bond with rating migration risk is established in this article. Under the structural framework, the credit rating migration is modeled by the first attempt in an incomplete market, so far as we know. The model results in a HJB system. With the help of the dynamic programming theory, a closed form solution is derived by imposing a condition on the credit rating migration boundary. With the explicit migration boundary and closed form solution, the model is easy to be applied in practice. Based on the pricing formula, the impacts of the parameters on the indifference price are analyzed and relative financial explanations are discussed.

Suggested Citation

  • Liang, Jin & Zhao, Yuejuan & Zhang, Xudan, 2016. "Utility indifference valuation of corporate bond with credit rating migration by structure approach," Economic Modelling, Elsevier, vol. 54(C), pages 339-346.
    • Handle: RePEc:eee:ecmode:v:54:y:2016:i:c:p:339-346
    DOI: 10.1016/j.econmod.2015.12.002
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    Cited by:

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    2. Shaozhen Chen & Bangqian Zhang & Jinjin Deng, 2018. "Research on Risk Measurement in Financial Market Based on GARCH-VaR and FHS¡ª¡ªAn Example of Chinese Bond Market," Applied Economics and Finance, Redfame publishing, vol. 5(4), pages 102-116, July.

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