Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/78414 
Year of Publication: 
2000
Series/Report no.: 
Bonn Econ Discussion Papers No. 15/2001
Publisher: 
University of Bonn, Bonn Graduate School of Economics (BGSE), Bonn
Abstract: 
In this paper a new credit risk model for credit derivatives is presented. The model is based upon the ‘Libor market’ modelling framework for default-free interest rates. We model effective default-free forward rates and effective forward credit spreads as lognormal diffusion processes, and recovery is modelled as a fraction of the par value of the defaulted claim. The newly introduced survival-based pricing measures are a valuable tool in the pricing of defaultable payoffs and allow a straightforward derivation of the no-arbitrage dynamics of forward rates and forward credit spreads. The model can be calibrated to the prices of defaultable coupon bonds, asset swap rates and default swap rates for which closed-form solutions are given. For options on default swaps and caps on credit spreads, approximate solutions of high accuracy exist. This pricing formula for options on default swaps is made exact in a modified modelling framework using an analogy to the swap measure, the default swap measure.
Subjects: 
Default Risk
Libor Market Model
Credit Derivatives
Default Swap
Asset Swap
Default Swaption
JEL: 
G13
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.