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Indifference of Defaultable Bonds with Stochastic Intensity models

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  • Regis Houssou
  • Olivier Besson

Abstract

The utility-based pricing of defaultable bonds in the case of stochastic intensity models of default risk is discussed. The Hamilton-Jacobi- Bellman (HJB) equations for the value functions is derived. A finite difference method is used to solve this problem. The yield-spreads for both buyer and seller are extracted. The behaviour of the spread curve given the default intensity is analyzed. Finally the impacts of the risk aversion and the correlation coefficient are discussed.

Suggested Citation

  • Regis Houssou & Olivier Besson, 2010. "Indifference of Defaultable Bonds with Stochastic Intensity models," Papers 1003.4118, arXiv.org.
    • Handle: RePEc:arx:papers:1003.4118
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    Cited by:

    1. Michael Ludkovski & Qunying Shen, 2012. "European Option Pricing with Liquidity Shocks," Papers 1205.1007, arXiv.org.
    2. Michael Ludkovski & Qunying Shen, 2013. "European Option Pricing With Liquidity Shocks," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(07), pages 1-30.
    3. Matthew Lorig, 2020. "Bond indifference prices and indifference yield curves," Papers 2007.09201, arXiv.org.

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