ISSN:
1573-7144
Keywords:
default risk
;
Heath-Jarrow-Morton model
;
term structure of interest rates
;
default probabilities
;
recovery rates
;
credit spreads
;
defaultable forward rates
Source:
Springer Online Journal Archives 1860-2000
Topics:
Economics
Notes:
Abstract In this paper we present a model of the development of the term structure of defaultable interest rates that is based on a multiple-defaults model. Instead of modelling a cash payoff in default we assume that defaulted debt is restructured and continues to be traded. The term structure of defaultable bond prices is represented in terms of defaultable forward rates similar to the Heath-Jarrow-Morton (HJM) (Heath et al., 1992) approach, and conditions are given under which the dynamics of these rates are arbitrage-free. These conditions are a drift restriction that is closely related to the HJM drift restriction for risk-free bonds, and the restriction that the defaultable short rate must always be not below the risk-free short rate. In its most general version the model is set in a marked point process framework, to allow for jumps in the defaultable rates at times of default.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF01531334
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