Pricing of Defaultable Securities Associated with Recovery Rate Under the Stochastic Interest Rate Driven by Fractional Brownian Motion

This paper considers an improved model of pricing defaultable bonds under the assumption that the interest rate satisfies the Vasicek model driven by fractional Brownian motion (fBm for short) based on the counterparty risk framework of Jarrow and Yu (2001). The authors use the theory of stochastic...

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Bibliographic Details
Published inJournal of systems science and complexity Vol. 32; no. 2; pp. 657 - 680
Main Authors Zhou, Qing, Wang, Qian, Wu, Weixing
Format Journal Article
LanguageEnglish
Published Beijing Academy of Mathematics and Systems Science, Chinese Academy of Sciences 01.04.2019
Springer Nature B.V
Subjects
Bonding
Brownian motion
Complex Systems
Control
Interest rates
Mathematical models
Mathematics
Mathematics and Statistics
Mathematics of Computing
Operations Research/Decision Theory
Pricing
Recovery
Statistics
Systems Theory
recovery rate
fractional Brownian motion
Counterparty risk
defaultable bond
Vasicek model
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Summary:This paper considers an improved model of pricing defaultable bonds under the assumption that the interest rate satisfies the Vasicek model driven by fractional Brownian motion (fBm for short) based on the counterparty risk framework of Jarrow and Yu (2001). The authors use the theory of stochastic analysis of fBm to derive pricing formulas for the defaultable bonds and study how the counterparty risk, recovery rate, and the Hurst parameter affect the values of the defaultable bonds. Numerical experiment results are presented to demonstrate the findings.
ISSN:1009-6124
1559-7067
DOI:10.1007/s11424-018-7119-7