Pricing Derivatives using the Asymptotic Expansion Approach: Credit Migration Models with Stochastic Credit Spreads

Yoshifumi Muroi, E. Kazuhiro Takino

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)345-372
Number of pages28
JournalAsia-Pacific Financial Markets
Volume18
Issue number4
DOIs
Publication statusPublished - 2011 Nov 1

Keywords

  • Credit default swaps
  • Credit migration model
  • Credit risk
  • Defaultable bonds
  • Options on defaultable bonds

ASJC Scopus subject areas

  • Finance

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