Applied and Computational Mathematics
Volume 3, Issue 6-1, December 2014, Pages: 8-11
Received: Aug. 1, 2014;
Accepted: Aug. 6, 2014;
Published: Aug. 13, 2014
Views 3406 Downloads 156
Fadugba Sunday Emmanuel, Department of Mathematical Sciences, Ekiti State University, Ado Ekiti, Ekiti State, Nigeria
Edogbanya Olaronke Helen, Department of Mathematics, Federal University, Lokoja, Kogi State, Nigeria
This paper presents hybrid model for the valuation of credit risk. Credit risk arises whenever a borrower is expecting to use future cash flows to pay a current debt. It is closely tied to the potential return of investment, the most notable being that the yields on bonds correlate strongly to their perceived credit risk. Hybrid model combines the structural and intensity-based approaches. While avoiding their difficulties, it picks the best features of both approaches; the economic and intuitive appeal of the structural approach and the tractability and empirical fit of the intensity-based approach. In credit derivatives market there are quite a few securities that depend on more than one source of risk, like corporate bonds and convertible bonds, most attractive credit models should involve all these three sources of risk, and interest-rate risk. Our framework brings together these standard block.
Fadugba Sunday Emmanuel,
Edogbanya Olaronke Helen,
On Hybrid Model for the Valuation of Credit Risk, Applied and Computational Mathematics. Special Issue: Computational Finance.
Vol. 3, No. 6-1,
2014, pp. 8-11.
F. Black and J.C. Cox, Valuing Corporate Securities: Some Effects of Bond Indenture Provisions, Journal of Finance, Vol. 31, (1976), 351-367.
F. Black and M. Scholes, The Pricing of Options and Corporate Liabilities Journal of Political Economy, Vol. 81, (1973), 637-654.
M. Crouly, D. Galev, R. Mark, Credit Risk Revisited, Risk-Credit Risk Supplement, March, 40-44, (1998).
D. Duffie and K. Singleton, Credit Risk Pricing and Risk Management for Financial Institutions, Princeton University Press, Princeton, (1999).
O. H. Edogbanya and S. E. Fadugba, On Structural Approach for the Valuation of Credit Risk, Journal of Mathematics and System Science, Vol. 4, (2014), 377-386.
R.J. Elliott and P.E. Kopp, Mathematics of Financial Market, Springer- Verlag, Brelin Heidelberg New York. (1999).
R.J. Elliott, Stochastic Calculus and Applications, Springer- Verlag, Brelin Heidelberg New York, (1982).
S. E. Fadugba and O. H. Edogbanya, On the Valuation of Credit Risk via Reduced-form Approach, Global Journal of Science Frontier Research, Vol. 14, No. 1, Version 1, (2014),49-61.
D.B. Madan and H. Unal, Pricing the Risk of Default, Rev. Derivatives Res, Vol. 2, (1998), 121-160.
R.C. Merton, On the Pricing of Corporate Debt: The Risk structure of Interest Rates, Journal of Finance Vol. 29, (1974), 449-470.
C.R. Nwozo and S.E. Fadugba, Some Numerical Methods for Options Valuation, Communications in Mathematical Finance, Vol.1, No. 1, (2012), 57-74.
S. Titman and W. Torous, Valuing Commercial Mortgages: An Empirical Investigation of the Contigent Claims Approach to Pricing Risky Debt, Journal of Finance, Vol.44, (1989), 345-373
L.A. Weiss, Bankrupty Resolution: Direct Costs and Violations of Priority of Claims, Journal of Financial Econmics, Vol. 27, (1999), 251-272.
L. Yang and H. Zhiqiang, Monte Carlo method for high-tech enterprise IPO market timing: Empirical steady based on American real option approach, International Journal of
Applied Mathematics and Statistics, Vol. 44, (2013), 188- 195.
Zhigang Wang, Yigui Ou and Baiguang Cai, Option pricing formula for stock model, International Journal of Applied Mathematics and Statistics, Vol. 27, (2012), 49-55.