A tractable LIBOR model with default risk
AbstractWe develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1202.0587.
Date of creation: Feb 2012
Date of revision: Oct 2012
Publication status: Published in Mathematics and Financial Economics 2013, Vol 7, No 2, 203-227
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Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-02-15 (All new papers)
- NEP-BEC-2012-02-15 (Business Economics)
- NEP-RMG-2012-02-15 (Risk Management)
- NEP-UPT-2012-02-15 (Utility Models & Prospect Theory)
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"A flexible matrix Libor model with smiles,"
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