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Author: | Jarrow, R. A. Lando, D. Turnbull, S. M. |
Title: | A Markov model for the term structure of credit risk spreads |
Journal: | Review of Financial Studies
1997 : SUMMER, VOL. 10:2, p. 481-523 |
Index terms: | MARKOV CHAINS CREDIT FINANCIAL RISK |
Language: | eng |
Abstract: | This paper presents a model for valuing risky debt that explicitly incorporates a company's credit rating as an indicator of the likelihood of default. The paper presents an arbitrage-free model for the term structure of credit risk spreads and their evolution through time. The model will prove useful for pricing and hedging of corporate debt with imbedded options, for the pricing and hedging of OTC derivatives with counterparty risk, for the pricing and hedging of government bonds subject to default risk, and for the pricing and hedging of credit derivatives. The model can also be used for risk management purposes. |
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