A Defaultable Callable Bond Pricing Model: a 3d Finite Difference Approach
نویسندگان
چکیده
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 allowed to be correlated with the default-free term structure. The call provision is modeled as a constraint on the value of the bond in the finite difference scheme. The numerical example shows that the 3D model is capable of pricing defaultable bonds with embedded call options adequately. This paper can provide new insight for future research on defaultable bond pricing models. JEL classifications: C00; G13
منابع مشابه
Pricing 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...
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