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Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility

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Abstract

This paper presents a class of defaultable term structure models within the HJM framework with stochastic volatility. Under certain volatility specifications, the model admits finite dimensional Markovian structures and consequently provides tractable solutions for interest rate derivatives. We also investigate the effect of stochastic volatility and of correlation between the stochastic volatility and credit spreads on the defaultable short rate and defaultable bond prices.

Suggested Citation

  • Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos-Sklibosios, 2010. "Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility," Research Paper Series 283, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:283
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    File URL: https://www.uts.edu.au/sites/default/files/qfr-archive-03/QFR-rp283.pdf
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    References listed on IDEAS

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    10. Carl Chiarella & Christina Nikitopoulos Sklibosios & Erik Schlögl, 2007. "A Markovian Defaultable Term Structure Model With State Dependent Volatilities," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 10(01), pages 155-202.
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    Citations

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    Cited by:

    1. N. Moreni & A. Pallavicini, 2014. "Parsimonious HJM modelling for multiple yield curve dynamics," Quantitative Finance, Taylor & Francis Journals, vol. 14(2), pages 199-210, February.
    2. Laura Morino & Wolfgang J. Ruggaldier, 2014. "On multicurve models for the term structure," Papers 1401.5431, arXiv.org.
    3. repec:eee:reveco:v:50:y:2017:i:c:p:261-274 is not listed on IDEAS
    4. Christa Cuchiero & Claudio Fontana & Alessandro Gnoatto, 2014. "A general HJM framework for multiple yield curve modeling," Papers 1406.4301, arXiv.org, revised May 2015.
    5. repec:wsi:ijtafx:v:16:y:2013:i:04:n:s0219024913500192 is not listed on IDEAS
    6. Christa Cuchiero & Claudio Fontana & Alessandro Gnoatto, 2014. "A general HJM framework for multiple yield curve modeling," Working Papers hal-01011752, HAL.
    7. Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos Sklibosios, 2013. "Credit Derivatives Pricing With Stochastic Volatility Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-28.
    8. Andrea Pallavicini & Damiano Brigo, 2013. "Interest-Rate Modelling in Collateralized Markets: Multiple curves, credit-liquidity effects, CCPs," Papers 1304.1397, arXiv.org.

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    Keywords

    Stochastic volatility; Heath-Jarrow-Morton model; defaultable forward rates; credit spreads;

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