A Note on the Feynman-Kac Formula and the Pricing of Defaultable Bonds
نویسندگان
چکیده
Th Feynman-Kac Formula offers an intuitive approach to solve PDE of financial assets. Traditionally, it is used to model financial assets without default risk.This paper demonstrates the usefulness of Feynman-Kac formula for pricing certain corporate bond models by revisiting Cathcart and El-Jahel (1998) and Schobel (1999).In the first model, a closed-form formula is derived to replace Cathcart and El-Jahel’s (1998) original numerical inversion of Laplace trans-formation for pricing defaultable bonds.In the second model, a simple expectation operation is used to replace Schobel’s (1999) original procedure of employing the heat equation and the Green function.
منابع مشابه
A comprehensive unified model of structural and reduced form type for defaultable fixed income bonds
The aim of this paper is to generalize the comprehensive structural model for defaultable fixed income bonds (considered in R. Agliardi, A comprehensive structural model for defaultable fixed-income bondsو Quant. Finance 11 (2011), no. 5, 749--762.) into a comprehensive unified model of structural and reduced form models. In our model the bond holders receive the deterministic co...
متن کاملApplication of semi-analytic method to compute the moments for solution of logistic model
The population growth, is increase in the number of individuals in population and it depends on some random environment effects. There are several different mathematical models for population growth. These models are suitable tool to predict future population growth. One of these models is logistic model. In this paper, by using Feynman-Kac formula, the Adomian decomposition method is applied to ...
متن کاملThe Pricing of Bermudan Options on Defaultable Bonds
The Pricing of Bermudan Options on Defaultable Bonds In this paper, we modify the Nelson and Ramaswamy (1990)-Ho, Stapleton and Subrahmanyam (1995) diffusion approximation. The modification allows the approximation of correlated lognormal diffusion processes. The general method is illustrated by pricing a Bermudan-style put option on the minimum of two asset prices. We then apply the method to ...
متن کاملA Defaultable Callable Bond Pricing Model: a 3d Finite Difference Approach
This paper presents a 3D model for pricing defaultable bonds with embedded call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is...
متن کاملPricing Callable Bonds with Stochastic Interest Rate and Stochastic Default Risk: a 3d Finite Difference Model
This paper presents a 3D model for pricing defaultable bonds with embedded call options. The pricing model incorporates three essential ingredients in the pricing of defaultable bonds: stochastic interest rate, stochastic default risk, and call provision. Both the stochastic interest rate and the stochastic default risk are modeled as a square-root diffusion process. The default risk process is...
متن کامل