Pricing Defaultable Bonds in a Markov Modulated Market

• Published in: Stochastic analysis and applications Vol. 30; no. 3; pp. 448 - 475
• Main Authors: Banerjee, Tamal, Ghosh, Mrinal K., Iyer, Srikanth K.
• Format: Journal Article
• Language: English
• Published: Philadelphia, PA Taylor & Francis Group 01.05.2012; Taylor & Francis
• Subjects: Credit spread; Defaultable bond; Exact sciences and technology; Mathematics; Minimal martingale measure; Probability and statistics; Probability theory and stochastic processes; Quadratic hedging; Sciences and techniques of general use; Stochastic analysis; Stochastic processes; Structural approach; Stochastic analysis; Risk rate; Price; Interest rate; Pricing; Incomplete market; Boundary condition; Partial differential equation; Martingale measure

We address the problem of pricing defaultable bonds in a Markov modulated market. Using Merton's structural approach we show that various types of defaultable bonds are combination of European type contingent claims. Thus pricing a defaultable bond is tantamount to pricing a contingent claim in...