Document Type
Article
Publication Date
2-13-2015
Publication Title
Journal of Mathematical Finance
Volume
5
Issue
1
First page number:
49
Last page number:
57
Abstract
We consider a rating-based model for the term structure of credit risk spreads wherein the credit worthiness of the issuer is represented as a finite-state continuous time Markov process. This approach entails a progressive drift in creditquality towards default. A model of the economy is presented featuring stochastic transition probabilities; credit instruments are valued via an ultraparabolic Hamilton-Jacobi system of equations discretized utilizing the method-of-lines finite difference method. Computations for a callable bond are presented demonstrating the efficiency of the method.
Keywords
Optimal stopping; Failure Rate; Regime Switching; Credit Risk Spreads
Disciplines
Applied Mathematics | Finance and Financial Management
File Format
File Size
1020 KB
Rights
IN COPYRIGHT. For more information about this rights statement, please visit http://rightsstatements.org/vocab/InC/1.0/
Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.
Repository Citation
Choi, S.,
Marcozzi, M. D.
(2015).
A Regime Switching Model for the Term Structure of Credit Risk Spreads.
Journal of Mathematical Finance, 5(1),
49-57.
http://dx.doi.org/10.4236/jmf.2015.51005