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Credit Spread Option Valuation under GARCH

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  • Tahani, N.
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    Abstract

    This paper develops closed-form solutions for options on credit spreads with GARCH models. We extend the mean-reverting model proposed in Longstaff and Schwartz (1995) and we use the Heston and Nandi's (1999) GARCH specification rather than the traditional lognormal. Our model, being more flexible, captures better the empirical properties of observed credit spreads and contains Longstaff and Schwartz (1995) model as a special case. GARCH coefficients are estimated using spread levels for corporate bonds.

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    Bibliographic Info

    Paper provided by Ecole des Hautes Etudes Commerciales de Montreal-Chaire de gestion des risques. in its series Ecole des Hautes Etudes Commerciales de Montreal- with number 00-07.

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    Length: 25 pages
    Date of creation: 2000
    Date of revision:
    Handle: RePEc:fth:etcori:00-07

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    Postal: Canada; ECOLE DES HAUTES ETUDES COMMERCIALES(H.E.C.),3000, chemin de la Cote-Sainte-Catherine. Montreal (Quebec) Canada H3T 2A7.
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    Web page: http://www.hec.ca/
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    Related research

    Keywords: CREDIT ; MODELS ; RISK;

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