The Mathematical Institute, University of Oxford, Eprints Archive

Modelling bonds and credit default swaps using a structural model with contagion

Haworth, Helen and Reisinger, Christoph and Shaw, William T. (2006) Modelling bonds and credit default swaps using a structural model with contagion. Quantitative Finance . (Submitted)

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Abstract

This paper develops a two-dimensional structural framework for valuing credit default swaps and corporate bonds in the presence of default contagion. Modelling the values of related firms as correlated geometric Brownian motions with exponential default barriers, analytical formulae are obtained for both credit default swap spreads and corporate bond yields. The credit dependence structure is influenced by both a longer-term correlation structure as well as by the possibility of default contagion. In this way, the model is able to generate a diverse range of shapes for the term structure of credit spreads using realistic values for input parameters.

Item Type:Article
Subjects:O - Z > Partial differential equations
O - Z > Probability theory and stochastic processes
Research Groups:Oxford Centre for Industrial and Applied Mathematics
Mathematical and Computational Finance Group
ID Code:628
Deposited By:Christoph Reisinger
Deposited On:11 Jul 2007
Last Modified:20 Jul 2009 14:23

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