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A jump to default extended CEV model: an application of Bessel processes

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  • Peter Carr

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  • Vadim Linetsky

    ()

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    Abstract

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    File URL: http://hdl.handle.net/10.1007/s00780-006-0012-6
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    Bibliographic Info

    Article provided by Springer in its journal Finance and Stochastics.

    Volume (Year): 10 (2006)
    Issue (Month): 3 (September)
    Pages: 303-330

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    Handle: RePEc:spr:finsto:v:10:y:2006:i:3:p:303-330

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    Related research

    Keywords: Default; Credit spread; Corporate bonds; Equity derivatives; Credit derivatives; Implied volatility skew; CEV model; Bessel processes; 60J35; 60J60; 60J65; 60G70; G12; G13;

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    References

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    1. Dennis, Patrick & Mayhew, Stewart & Stivers, Chris, 2006. "Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 41(02), pages 381-406, June.
    2. Geert Bekaert & Guojun Wu, 1997. "Asymmetric Volatility and Risk in Equity Markets," NBER Working Papers 6022, National Bureau of Economic Research, Inc.
    3. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Martijn Cremers & Joost Driessen & Pascal Maenhout & David Weinbaum, 2004. "Individual Stock-Option Prices and Credit Spreads," Yale School of Management Working Papers amz2391, Yale School of Management, revised 01 Jan 2005.
    5. John Y. Campbell & Glen B. Taksler, 2002. "Equity Volatility and Corporate Bond Yields," NBER Working Papers 8961, National Bureau of Economic Research, Inc.
    6. Hentschel, Ludger & Campbell, John, 1992. "No News is Good News: An Asymmetric Model of Changing Volatility in Stock Returns," Scholarly Articles 3220232, Harvard University Department of Economics.
    7. Haugen, Robert A & Talmor, Eli & Torous, Walter N, 1991. " The Effect of Volatility Changes on the Level of Stock Prices and Subsequent Expected Returns," Journal of Finance, American Finance Association, vol. 46(3), pages 985-1007, July.
    8. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, EconWPA.
    9. Li Chen & Damir Filipović, 2005. "A simple model for credit migration and spread curves," Finance and Stochastics, Springer, vol. 9(2), pages 211-231, 04.
    10. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
    11. Hilscher, Jens, 2007. "Is the corporate bond market forward looking?," Working Paper Series 0800, European Central Bank.
    12. R. J. Elliott & M. Jeanblanc & M. Yor, 2000. "On Models of Default Risk," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 179-195.
    13. J. Aquilina & L. C. G. Rogers, 2004. "The Squared Ornstein-Uhlenbeck Market," Mathematical Finance, Wiley Blackwell, vol. 14(4), pages 487-513.
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    Citations

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    Cited by:
    1. Matthew Lorig & Stefano Pagliarani & Andrea Pascucci, 2013. "A family of density expansions for L\'evy-type processes," Papers 1312.7328, arXiv.org.
    2. Câmara, António & Popova, Ivilina & Simkins, Betty, 2012. "A comparative study of the probability of default for global financial firms," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 717-732.
    3. Ruas, João Pedro & Dias, José Carlos & Vidal Nunes, João Pedro, 2013. "Pricing and static hedging of American-style options under the jump to default extended CEV model," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4059-4072.
    4. Cousot, Laurent, 2007. "Conditions on option prices for absence of arbitrage and exact calibration," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3377-3397, November.
    5. Jan-Frederik Mai & Marc Wittlinger, 2013. "Pricing bonds with optional sinking feature using Markov Decision Processes," Papers 1305.5220, arXiv.org.
    6. Xiao, Tim, 2013. "Is the Jump-Diffusion Model a Good Solution for Credit Risk Modeling? The Case of Convertible Bonds," MPRA Paper 47366, University Library of Munich, Germany.
    7. Luciano Campi & Umut Cetin & Albina Danilova, 2013. "Explicit construction of a dynamic Bessel bridge of dimension 3," LSE Research Online Documents on Economics 45263, London School of Economics and Political Science, LSE Library.
    8. Campi, Luciano & Polbennikov, Simon & Sbuelz, Alessandro, 2009. "Systematic equity-based credit risk: A CEV model with jump to default," Journal of Economic Dynamics and Control, Elsevier, vol. 33(1), pages 93-108, January.
    9. Jan Baldeaux & Katja Ignatieva & Eckhard Platen, 2012. "A Tractable Model for Indices Approximating the Growth Optimal Portfolio," Research Paper Series 318, Quantitative Finance Research Centre, University of Technology, Sydney.
    10. Xiao, Tim, 2014. "A Simple and Precise Method for Pricing Convertible Bond with Credit Risk," MPRA Paper 53982, University Library of Munich, Germany.
    11. Andrey Itkin, 2013. "New solvable stochastic volatility models for pricing volatility derivatives," Review of Derivatives Research, Springer, vol. 16(2), pages 111-134, July.
    12. Rafael Mendoza-Arriaga & Vadim Linetsky, 2011. "Pricing equity default swaps under the jump-to-default extended CEV model," Finance and Stochastics, Springer, vol. 15(3), pages 513-540, September.
    13. Matthew Lorig, 2011. "Pricing Derivatives on Multiscale Diffusions: an Eigenfunction Expansion Approach," Papers 1109.0738, arXiv.org, revised Apr 2012.
    14. Matthew Lorig, 2012. "The Exact Smile of some Local Volatility Models," Papers 1207.0750, arXiv.org, revised Nov 2012.
    15. Xu, Ruxing, 2011. "A lattice approach for pricing convertible bond asset swaps with market risk and counterparty risk," Economic Modelling, Elsevier, vol. 28(5), pages 2143-2153, September.
    16. Matthew Lorig & Stefano Pagliarani & Andrea Pascucci, 2013. "A Taylor series approach to pricing and implied vol for LSV models," Papers 1308.5019, arXiv.org.
    17. Claudio Fontana & Juan Miguel A. Montes, 2012. "A unified approach to pricing and risk management of equity and credit risk," Papers 1212.5395, arXiv.org, revised May 2013.
    18. Bao, Qunfang & Li, Shenghong & Gong, Donggeng, 2012. "Pricing VXX option with default risk and positive volatility skew," European Journal of Operational Research, Elsevier, vol. 223(1), pages 246-255.
    19. Thomas R. Hurd & Zhuowei Zhou, 2011. "Two-factor capital structure models for equity and credit," Papers 1110.5846, arXiv.org.

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