Defaultable Puttable/Callable Bond Valuation: A 3D Finite Difference Model
AbstractThis paper presents a 3D model for pricing defaultable bonds with embedded put/call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and put/call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is allowed to be correlated with the default-free term structure. The put/call provision is modeled as a constraint on the value of the bond in the finite difference scheme. This paper can provide new insight for future research on defaultable bond pricing models.
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Bibliographic InfoPaper provided by EconWPA in its series Finance with number 0511018.
Length: 10 pages
Date of creation: 29 Nov 2005
Date of revision:
Note: Type of Document - pdf; pages: 10
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Defaultable Bond; Embedded Option; Partial Differential Equation; Finite Difference Method;
Find related papers by JEL classification:
- G - Financial Economics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-12-09 (All new papers)
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