Pricing bonds and CDS in the model with rating migration induced by a Cox process
Volume 83 / 2008
Banach Center Publications 83 (2008), 159-182
MSC: Primary 62P05; Secondary 60J27, 91B70.
DOI: 10.4064/bc83-0-10
Abstract
We investigate the properties of a rating migration process assuming that it is given by subordination of a discrete time Markov chain and a Cox process. The problem of pricing of defaultable bonds with fractional recovery of par value with rating migration and credit default swaps is considered. As an example of applications of our results, we give an explicit solution to the pricing problem in a model with short rate and intensity processes given by the solution of a two-dimensional Ornstein-Uhlenbeck equation with a Lévy noise.
