Bank of America Fixed Income Research Working Paper
24 Pages Posted: 9 Mar 2001
Date Written: January, 2001
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: Suggested Citation