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On the pricing of defaultable bonds and Hitting times of Ito processes

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  • Hernández del Valle Gerardo

Abstract

The main aim of this work is to price defaultable bonds. In order to achieve this goal we link first hitting densities of Brownian motion with functionals of controlled diffusions. From a practical point of view examples of diffusions with this property are: Brownian motion with linear drfit, the 3D Bessel process, the 3D Bessel bridge, and the Brownian bridge, just to mention a few. In turn, these processes are used in finance and economics since they may fall within the category of controlled processes, and/or mean reverting processes.

Suggested Citation

  • Hernández del Valle Gerardo, 2015. "On the pricing of defaultable bonds and Hitting times of Ito processes," Working Papers 2015-21, Banco de México.
    • Handle: RePEc:bdm:wpaper:2015-21
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    File URL: https://www.banxico.org.mx/publications-and-press/banco-de-mexico-working-papers/%7BDC52F3F7-627D-0840-9D33-A89CD6E82EC9%7D.pdf
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    References listed on IDEAS

    as
    1. Laura E. Jackson & Kevin L. Kliesen & Michael T. Owyang, 2015. "A Measure of Price Pressures," Review, Federal Reserve Bank of St. Louis, vol. 97(1), pages 25-52.
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    More about this item

    Keywords

    Bond valuation; Ito processes; hitting times;
    All these keywords.

    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G0 - Financial Economics - - General
    • G1 - Financial Economics - - General Financial Markets

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