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Pricing defaultable bonds under Hawkes jump-diffusion processes

Author

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  • Chen, Li
  • Ma, Yong
  • Xiao, Weilin

Abstract

In this paper, we propose a reduced-form model for the embedded credit risk in corporate bonds. We specify the default hazard rate as an affine function of a series of influential variables. To capture the clustering property in some extreme situations, Hawkes jump-diffusion processes are adopted to model the variables. We derive the semi-analytical pricing formula for defaultable bonds. The empirical results from U.S. bond market illustrate the significance of jump clustering when pricing low credit-rating bonds.

Suggested Citation

  • Chen, Li & Ma, Yong & Xiao, Weilin, 2022. "Pricing defaultable bonds under Hawkes jump-diffusion processes," Finance Research Letters, Elsevier, vol. 47(PB).
    • Handle: RePEc:eee:finlet:v:47:y:2022:i:pb:s1544612322000587
    DOI: 10.1016/j.frl.2022.102738
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    References listed on IDEAS

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    Cited by:

    1. Xiangdong Liu & Jiahui Wu & Xianglong Li, 2023. "Research on Financial Default Model with Stochastic Intensity Using Filtered Likelihood Method," Mathematics, MDPI, vol. 11(14), pages 1-19, July.

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