Credit Explosives

Bank of America Fixed Income Research Working Paper

24 Pages Posted: 9 Mar 2001

Date Written: January, 2001

Abstract

This paper suggests a new type of model for risky bonds, default swaps, and first-to-default basket swaps in which the instantaneous default intensity is modeled as an explosive process. Survival probabilities, transition densities, explosion time distributions, and Green?s functions are derived in closed form, and we describe how to calibrate the model to market data. For first-to-default basket swaps we show that increasing the explosion probability increases the price effect of correlation between default intensity processes.

JEL Classification: G13

Suggested Citation

Andreasen, Jesper, Credit Explosives (January, 2001). Bank of America Fixed Income Research Working Paper, Available at SSRN: https://ssrn.com/abstract=262682 or http://dx.doi.org/10.2139/ssrn.262682

Jesper Andreasen (Contact Author)

Saxo Bank ( email )

Philip Heymans Alle 15
Hellerup, 2900
Denmark

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