Journal of Applied Mathematics

Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model

Beom Jin Kim, Chan Yeol Park, and Yong-Ki Ma

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Abstract

We propose approximate solutions for pricing zero-coupon defaultable bonds, credit default swap rates, and bond options based on the averaging principle of stochastic differential equations. We consider the intensity-based defaultable bond, where the volatility of the default intensity is driven by multiple time scales. Small corrections are computed using regular and singular perturbations to the intensity of default. The effectiveness of these corrections is tested on the bond price and yield curve by investigating the behavior of the time scales with respect to the relevant parameters.

Article information

Source
J. Appl. Math., Volume 2014 (2014), Article ID 968065, 12 pages.

Dates
First available in Project Euclid: 2 March 2015

Permanent link to this document
https://projecteuclid.org/euclid.jam/1425305991

Digital Object Identifier
doi:10.1155/2014/968065

Mathematical Reviews number (MathSciNet)
MR3253642

Citation

Kim, Beom Jin; Park, Chan Yeol; Ma, Yong-Ki. Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model. J. Appl. Math. 2014 (2014), Article ID 968065, 12 pages. doi:10.1155/2014/968065. https://projecteuclid.org/euclid.jam/1425305991


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