A tractable LIBOR model with default risk

Details A tractable LIBOR model with default risk A tractable LIBOR model with default risk

2012-02-03

arxiv.org/abs/1202.0587v1

Economy

Quantitative Finance

Pricing of Securities

25 pages

Scientific paper

We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.

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