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Credit risk with semimartingales and risk-neutrality

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  • Colino, Jesús P.
  • Stute, Winfried

Abstract

A no-arbitrage framework to model interest rates with credit risk, based on the LIBOR additive process, and an approach to price corporate bonds in incomplete markets, is presented in this paper. We derive the no-arbitrage conditions under different conditions of recovery, and we obtain new expressions in order to estimate the probabilities of default under risk-neutral measure.

Suggested Citation

  • Colino, Jesús P. & Stute, Winfried, 2008. "Credit risk with semimartingales and risk-neutrality," DES - Working Papers. Statistics and Econometrics. WS ws085417, Universidad Carlos III de Madrid. Departamento de Estadística.
    • Handle: RePEc:cte:wsrepe:ws085417
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    References listed on IDEAS

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