Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/78387
Authors: 
Schönbucher, Philipp J.
Year of Publication: 
2000
Series/Report no.: 
Bonn Econ Discussion Papers 17/2001
Abstract: 
In this paper we present a tree model for defaultable bond prices which can be used for the pricing of credit derivatives. The model is based upon the two-factor Hull-White (1994) model for default-free interest rates, where one of the factors is taken to be the credit spread of the defaultable bond prices. As opposed to the tree model of Jarrow and Turnbull (1992), the dynamics of default-free interest rates and credit spreads in this model can have any desired degree of correlation, and the model can be fitted to any given term structures of default-free and defaultable bond prices, and to the term structures of the respective volatilities. Furthermore the model can accommodate several alternative models of default recovery, including the fractional recovery model of Duffie and Singleton (1994) and recovery in terms of equivalent default-free bonds (see e.g. Lando (1998)). Although based on a Gaussian setup, the approach can easily be extended to non-Gaussian processes that avoid negative interest-rates or credit spreads.
Subjects: 
credit derivatives
credit risk
implementation
Hull-White model
JEL: 
G13
Document Type: 
Working Paper

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