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Semi-analytical pricing of defaultable bonds in a signaling jump-default model

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  • Lara Cathcart and Lina El-Jahel

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ABSTRACT This paper derives analytical solutions for defaultable bonds when the underlying interest rates follow a mean-reverting square-root process. The default event occurs in an expected or an unexpected manner when the value of a signaling process that represents the credit quality of the issuer reaches a certain lower threshold or at the first jump time of a hazard-rate process, respectively. The hazard rate is dependent on the default-free interest rate. The model generates term structures of credit spreads which are consistent with empirical observations.

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  • Lara Cathcart and Lina El-Jahel, . "Semi-analytical pricing of defaultable bonds in a signaling jump-default model," Journal of Computational Finance, Journal of Computational Finance.
    • Handle: RePEc:rsk:journ0:2160478
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