DefaultRisk.com the web's biggest credit risk modeling resource. |  |
|
|
| A Direct Approach to Arbitrage-Free Pricing of Credit Derivatives by Sanjiv Ranjan Das of Harvard University, and November 1998 Abstract: This paper develops a framework for modelling risky debt and valuing credit derivatives that is flexible and simple to implement, and that is, to the maximum extent possible, based on observables. Our approach is based on expanding the Heath-Jarrow-Morton term-structure model to allow for defaultable debt. We do not follow the procedure of implying out the behavior of spreads from assumptions concerning the default process, instead working directly with the evolution of spreads. We show that risk-neutral drifts in the resulting model possess a recursive representation that particularly facilitates implementation and makes it possible to handle path-dependence and early exercise features without difficulty. The framework permits embedding a variety of specifications for default; we present an empirical example of a default structure which provides promising calibration results. Books Referenced in this Paper: (what is this?)
Download paper (307K PDF) 27 pages
[Home] [Credit Derivatives Papers]  |
|
Please contact me with problems or suggestions. |
