Defaultable Bonds via HKA

Details Defaultable Bonds via HKA Defaultable Bonds via HKA

2011-03-23

arxiv.org/abs/1103.4541v1

Economy

Quantitative Finance

Computational Finance

Scientific paper

To construct a no-arbitrage defaultable bond market, we work on the state price density framework. Using the heat kernel approach (HKA for short) with the killing of a Markov process, we construct a single defaultable bond market that enables an explicit expression of a defaultable bond and credit spread under quadratic Gaussian settings. Some simulation results show that the model is not only tractable but realistic.

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