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

  • Qing ZhouEmail author
  • Qian Wang
  • Weixing Wu
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Abstract

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.

Keywords

Counterparty risk defaultable bond fractional Brownian motion recovery rate Vasicek model 

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Notes

Acknowledgements

The authors are deeply grateful to the anonymous referees and the editors for the careful reading and valuable comments, which have greatly improved the quality of the paper. They would also like to thank Weilin Xiao and Man Shi for their help.

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Copyright information

© Institute of Systems Science, Academy of Mathematics and Systems Science, Chinese Academy of Sciences and Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.School of ScienceBeijing University of Posts and TelecommunicationsBeijingChina
  2. 2.School of Banking and FinanceUniversity of International Business and EconomicsBeijingChina

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