This paper analyzes corporate bond valuation and optimal call and default rules when interest rates and firm value are stochastic. It then uses the results to explain the dynamics of hedging. Bankruptcy rules are important determinants of corporate bond sensitivity to interest rates and firm value. Although endogenous and exogenous bankruptcy models can be calibrated to produce the same prices,...

‎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...

In this paper, we study an optimal excess-of-loss reinsurance and investment problem for an insurer in defaultable market. The insurer can buy reinsurance and invest in the following securities: a bank account, a risky asset with stochastic volatility and a defaultable corporate bond. We discuss the optimal investment strategy into two subproblems: a pre-default case and a post-default case. We...

The present paper analyzes the optimal investment strategy in a defaultable (corporate) bond and a money market account in a continuous time model. Due to jumps in the bond price our market model is incomplete. The treatment of information on the firm’s asset value is based on an approach unifying the structural model and the reduced-form model. Specifically, the asset value will be assumed to ...

We study the pricing of defaultable derivatives, such as bonds, bond options, and credit default swaps in the reduced form framework of intensity-based models. We use regular and singular perturbation expansions on the intensity of default from which we derive approximations for the pricing functions of these derivatives. In particular, we assume an Ornstein-Uhlenbeck process for the interest r...

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...

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...

We consider a portfolio optimization problem in a defaultable market with finitely-many economical regimes, where the investor can dynamically allocate her wealth among a defaultable bond, a stock, and a money market account. The market coefficients are assumed to depend on the market regime in place, which is modeled by a finite state continuous time Markov process. By separating the utility m...