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

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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.

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Authors and Affiliations

  1. School of Science, Beijing University of Posts and Telecommunications, Beijing, 100876, China

    Qing Zhou & Qian Wang

  2. School of Banking and Finance, University of International Business and Economics, Beijing, 100029, China

    Weixing Wu

Authors
  1. Qing Zhou
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  2. Qian Wang
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  3. Weixing Wu
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Corresponding authors

Correspondence to Qing Zhou, Qian Wang or Weixing Wu.

Additional information

The work of ZHOU Qing is supported by the National Natural Science Foundation of China under Grant Nos. 11471051 and 11871010. The work of WU Weixing is supported by the National Social Science Foundation of China under Grant No. 16ZDA033.

This paper was recommended for publication by Editor WANG Shouyang.

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Zhou, Q., Wang, Q. & Wu, W. Pricing of Defaultable Securities Associated with Recovery Rate Under the Stochastic Interest Rate Driven by Fractional Brownian Motion. J Syst Sci Complex 32, 657–680 (2019). https://doi.org/10.1007/s11424-018-7119-7

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  • DOI: https://doi.org/10.1007/s11424-018-7119-7

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