Asymptotic approximation of the hitting-time and evaluation of a risky bond
AbstractIn this paper, we give an approximation for the density of the first–passage time through a boundary defined by smooth function S(t). The density is a solution of some Voltera integral and admits an expansion of the Neumann-type series, and the error term converges rapidly to zero. We examine the case of a non homogeneous-time Brownian diffusion which is related to the evaluation of many claims on financial asset. An application to the approximated valuation of risky bonds and options on the asset of levered firm is provided.
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Bibliographic InfoPaper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 04-029.RS.
Length: 25 p.
Date of creation: 2004
Date of revision:
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More information through EDIRC
hitting-time; Brownian diffusion; levered firm.;
Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
- C40 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - General
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- Leland, Hayne E & Toft, Klaus Bjerre, 1996.
" Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads,"
Journal of Finance,
American Finance Association, vol. 51(3), pages 987-1019, July.
- Hayne E. Leland and Klaus Bjerre Toft., 1995. "Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads," Research Program in Finance Working Papers RPF-259, University of California at Berkeley.
- Longstaff, Francis A & Schwartz, Eduardo S, 1995. " A Simple Approach to Valuing Risky Fixed and Floating Rate Debt," Journal of Finance, American Finance Association, vol. 50(3), pages 789-819, July.
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