Defaultable bond pricing using regime switching intensity model. (English) Zbl 1274.91480
Summary: In this paper, we are interested in finding explicit numerical formulas to evaluate defaultable bonds prices of firms. For this purpose, we use a default intensity whose values depend on the credit rating of these firms. Each credit rating corresponds to a state of the default intensity. Then, this regime switches as soon as one of the credit rating of a firm also changes. Moreover, this regime switching default intensity model allows us to capture well some market features or economics behaviors. Thus, we obtain two explicit different formulas to evaluate the conditional Laplace transform of a regime switching Cox-Ingersoll-Ross model. One using the property of semi-affine of the model and the other one using analytic approximation. We conclude by giving some numerical illustrations of these formulas and real data estimation results.
MSC:
91G60 | Numerical methods (including Monte Carlo methods) |
91G50 | Corporate finance (dividends, real options, etc.) |
60H10 | Stochastic ordinary differential equations (aspects of stochastic analysis) |
65C40 | Numerical analysis or methods applied to Markov chains |