Credit derivatives pricing with default density term structure modelled by Lévy random fields

Lijun Bo (1) , Ying Jiao (2) , Xuewei Yang (3)

1 Department of Mathematics, Xidian University
2 Laboratoire de Sciences Actuarielle et Financière
3 School of Mathematical Sciences, Nankai University

We model the term structure of the forward default intensity and the default density by using Lévy random fields, which allow us to consider the credit derivatives with an after-default recovery payment. As applications, we study the pricing of a defaultable bond and represent the pricing kernel as the unique solution of a parabolic integro-differential equation. Finally, we illustrate by numerical examples the impact of the contagious jump risks on the defaultable bond price in our model.

Domaines: Pricing [q-fin.PR]; Economies et finances; Probabilités [math.PR]

Lijun Bo, Ying Jiao, Xuewei Yang. Credit derivatives pricing with default density term structure modelled by Lévy random fields. Stochastic Analysis and Applications, 2014, 32 (2), pp.229-252. ⟨hal-00651397⟩