This paper develops a model to value defaultable bonds in emerging markets. Default occurs when some signaling process hits a pre-defined default barrier. The signaling variable is considered to be some macro-economic variables such as foreign exchange rates. The dynamics of the default barrier depend on the volatility and the drift of the signaling variable. We derive a closedform solution of ...

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...

It is well known that a defaultable bond subject to recovery of market value (RMV) is priced by discounting the payoff with an adjusted short rate by the loss rate and the default intensity rate of the issuer. We show that the formula can be generalized for a defaultable contract subject to RMV with heterogeneous multiple reference firms. The discounting short rate is adjusted by sum of the los...

This paper develops a stress-testing model to value defaultable bonds under stressful market conditions. Default occurs when some signaling process hits a pre-defined default barrier. The signaling variable is considered to be some macro-economic variables such as foreign exchange rates. The dynamics of the default barrier depends on the volatility and the drift of the signaling variable. We de...

We propose a reduced form model for default that allows us to derive closed-form solutions to all the key ingredients in credit risk modeling: risk-free bond prices, defaultable bond prices (with and without stochastic recovery) and probabilities of survival. We show that all these quantities can be represented in general exponential quadratic forms, despite the fact that the intensity is allow...

Corporate bond yields are sensitive to labor market conditions. During the 1929-2015 period, a one percentage point increase in the unemployment rate is associated with a widening of the Baa-Aaa credit spread by 13 basis points. This paper explores the impact of labor market conditions on credit risk, by incorporating defaultable debt into an otherwise standard Diamond-MortensenPissarides labor...

The paper deals with defaultable markets, one of the main research areas of mathematical finance. It proposes a new approach to the theory of such markets using techniques from the calculus of optional stochastic processes on unusual probability spaces, which was not presented before. The paper is a foundation paper and contains a number of fundamental results on modeling of defaultable markets...

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 ...

We analyze pricing and portfolio optimization problems in defaultable regime switching markets driven by a underlying continuous-time Markov process. We contribute to both of these problems by obtaining new representations of option prices and optimal portfolio strategies under regime-switching. Using our option price representation, we develop a novel efficient method to price claims which may...