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Pricing Defaultable Securities under Actual Probability Measure

Author

Listed:
  • Feng Jianfen

    (School of Banking and Economics, UIBE, Beijing100029, China)

  • Chen Dianfa

    (School of Economics, Nankai University, Tianjin300071, China)

  • Yu Mei

    (School of Banking and Economics, UIBE, Beijing100029, China)

Abstract

In this paper, a new approach is developed to estimate the value of defaultable securities under the actual probability measure. This model gives the price framework by means of the method of backward stochastic differential equation. Such a method solves some problems in most of existing literatures with respect to pricing the credit risk and relaxes certain market limitations. We provide the price of defaultable securities in discrete time and in continuous time respectively, which is favorable to practice to manage real credit risk for finance institutes.

Suggested Citation

  • Feng Jianfen & Chen Dianfa & Yu Mei, 2014. "Pricing Defaultable Securities under Actual Probability Measure," Journal of Systems Science and Information, De Gruyter, vol. 2(4), pages 313-334, August.
    • Handle: RePEc:bpj:jossai:v:2:y:2014:i:4:p:313-334:n:3
    DOI: 10.1515/JSSI-2014-0313
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    References listed on IDEAS

    as
    1. Antje Berndt & Rohan Douglas & Darrell Duffie & Mark Ferguson, "undated". "Measuring Default Risk Premia from Default Swap Rates and EDFs," GSIA Working Papers 2006-E31, Carnegie Mellon University, Tepper School of Business.
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    3. Ivailo Izvorski, 1997. "Recovery Ratios and Survival Times for Corporate Bonds," IMF Working Papers 1997/084, International Monetary Fund.
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    5. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," The Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    6. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    7. P. Collin-Dufresne & R. Goldstein & J. Hugonnier, 2004. "A General Formula for Valuing Defaultable Securities," Econometrica, Econometric Society, vol. 72(5), pages 1377-1407, September.
    8. Dariusz Gatarek & Juliusz Jabłecki, 2013. "A model for dependent defaults and pricing contingent claims with counterparty risk," NBP Working Papers 150, Narodowy Bank Polski.
    Full references (including those not matched with items on IDEAS)

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