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An Extension Of The Brody–Hughston–Macrina Approach To Modeling Of Defaultable Bonds

Author

Listed:
  • MAREK RUTKOWSKI

    (School of Mathematics, University of New South Wales, Sydney, NSW 2052, Australia)

  • NANNAN YU

    (School of Mathematics, University of New South Wales, Sydney, NSW 2052, Australia)

Abstract

The innovative information-based framework for credit risk modeling, proposed recently by Brody, Hughston, and Macrina, is extended to a more general and practically important setup of random interest rates. We first introduce the market model, and we derive an explicit expression for defaultable bond price. Next, the dynamics of the information process and dynamics of defaultable bond are found for both deterministic and random interest rates. Finally, the valuation and hedging of derivative securities are briefly examined. In particular, the valuation formula for a European option on a defaultable bond is established.

Suggested Citation

  • Marek Rutkowski & Nannan Yu, 2007. "An Extension Of The Brody–Hughston–Macrina Approach To Modeling Of Defaultable Bonds," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(03), pages 557-589.
    • Handle: RePEc:wsi:ijtafx:v:10:y:2007:i:03:n:s0219024907004263
    DOI: 10.1142/S0219024907004263
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    Cited by:

    1. Lane P. Hughston & Leandro Sánchez-Betancourt, 2020. "Pricing with Variance Gamma Information," Risks, MDPI, vol. 8(4), pages 1-22, October.
    2. George Bouzianis & Lane P. Hughston & Leandro S'anchez-Betancourt, 2022. "Information-Based Trading," Papers 2201.08875, arXiv.org, revised Jan 2024.
    3. Lane P. Hughston & Leandro S'anchez-Betancourt, 2020. "Pricing with Variance Gamma Information," Papers 2003.07967, arXiv.org, revised Sep 2020.

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