Pricing Derivatives using the Asymptotic Expansion Approach: Credit Migration Models with Stochastic Credit Spreads |
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Authors: | Yoshifumi Muroi E Kazuhiro Takino |
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Institution: | 1.Graduate School of Economics and Management,Tohoku University,Sendai City,Japan;2.Faculty of Commerce,Nagoya University of Commerce and Business,Komenoki-Cho Nisshin City, Aichi,Japan |
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Abstract: | The purpose of this paper is to evaluate the asymptotic approximation formulas for the price of contingent claims with credit
risk, such as credit default swaps and options on defaultable bonds, in a Markovian credit migration model. Often the generator
matrix of a credit migration process is assumed to be deterministic; however, a stochastically varying generator matrix is
used in this paper. To apply such a model to the valuation of options on defaultable bonds, the small disturbance asymptotic
expansion approach of Kunitomo and Takahashi is used in this study. |
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Keywords: | |
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