A tractable LIBOR model with default risk
We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.
|Date of creation:||Feb 2012|
|Date of revision:||Oct 2012|
|Publication status:||Published in Mathematics and Financial Economics 2013, Vol 7, No 2, 203-227|
|Contact details of provider:|| Web page: http://arxiv.org/|
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