Defaultable Bonds via HKA
To construct a no-arbitrage defaultable bond market, we work on the state price density framework. Using the heat kernel approach (HKA for short) with the killing of a Markov process, we construct a single defaultable bond market that enables an explicit expression of a defaultable bond and credit spread under quadratic Gaussian settings. Some simulation results show that the model is not only tractable but realistic.
References listed on IDEAS
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- Jirô Akahori & Takahiro Tsuchiya, 2006.
"What is the Natural Scale for a Lévy Process in Modelling Term Structure of Interest Rates?,"
Asia-Pacific Financial Markets,
Springer, vol. 13(4), pages 299-313, December.
- Jir\^o Akahori & Takahiro Tsuchiya, 2006. "What is the natural scale for a L\'evy process in modelling term structure of interest rates?," Papers math/0612341, arXiv.org.
- Joanne Kennedy & Phil Hunt & Antoon Pelsser, 2000. "Markov-functional interest rate models," Finance and Stochastics, Springer, vol. 4(4), pages 391-408.
- Jeffery D Amato & Eli M Remolona, 2003. "The credit spread puzzle," BIS Quarterly Review, Bank for International Settlements, December.
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