On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate
In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are allowed to...
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doaj-7babbc5a192b4519b210ea4fe05432132020-11-24T20:49:10ZengMDPI AGJournal of Risk and Financial Management1911-80742018-12-011148710.3390/jrfm11040087jrfm11040087On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest RateHong-Ming Yin0Jin Liang1Yuan Wu2Department of Mathematics and Statistics, Washington State University, Pullman, WA 99164, USADepartment of Mathematics, Tongji University, Shanghai 200092, ChinaSchool of Statistics and Mathematics, Shanghai Lixin University of Accounting and Finance, Shanghai 201209, ChinaIn this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are allowed to happen a finite number of times during the life-span of the bond. The volatility of a corporate bond price may have a jump when a credit rating for the bond is changed. Moreover, the volatility of the bond is also assumed to depend on the interest rate. This new model improves the previous existing bond models in which the rating change is only allowed to occur once with an interest-dependent volatility or multi-ratings with constant interest rate. By using a Feynman-Kac formula, we obtain a free boundary problem. Global existence and uniqueness are established when the interest rate follows a Vasicek’s stochastic process. Calibration of the model parameters and some numerical calculations are shown.https://www.mdpi.com/1911-8074/11/4/87corporate bond-pricing modelmulti credit rating migrationjump volatilitystochastic interest rate |
collection |
DOAJ |
language |
English |
format |
Article |
sources |
DOAJ |
author |
Hong-Ming Yin Jin Liang Yuan Wu |
spellingShingle |
Hong-Ming Yin Jin Liang Yuan Wu On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate Journal of Risk and Financial Management corporate bond-pricing model multi credit rating migration jump volatility stochastic interest rate |
author_facet |
Hong-Ming Yin Jin Liang Yuan Wu |
author_sort |
Hong-Ming Yin |
title |
On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate |
title_short |
On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate |
title_full |
On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate |
title_fullStr |
On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate |
title_full_unstemmed |
On a New Corporate Bond Pricing Model with Potential Credit Rating Change and Stochastic Interest Rate |
title_sort |
on a new corporate bond pricing model with potential credit rating change and stochastic interest rate |
publisher |
MDPI AG |
series |
Journal of Risk and Financial Management |
issn |
1911-8074 |
publishDate |
2018-12-01 |
description |
In this paper, we consider a new corporate bond-pricing model with credit-rating migration risks and a stochastic interest rate. In the new model, the criterion for rating change is based on a predetermined ratio of the corporation’s total asset and debt. Moreover, the rating changes are allowed to happen a finite number of times during the life-span of the bond. The volatility of a corporate bond price may have a jump when a credit rating for the bond is changed. Moreover, the volatility of the bond is also assumed to depend on the interest rate. This new model improves the previous existing bond models in which the rating change is only allowed to occur once with an interest-dependent volatility or multi-ratings with constant interest rate. By using a Feynman-Kac formula, we obtain a free boundary problem. Global existence and uniqueness are established when the interest rate follows a Vasicek’s stochastic process. Calibration of the model parameters and some numerical calculations are shown. |
topic |
corporate bond-pricing model multi credit rating migration jump volatility stochastic interest rate |
url |
https://www.mdpi.com/1911-8074/11/4/87 |
work_keys_str_mv |
AT hongmingyin onanewcorporatebondpricingmodelwithpotentialcreditratingchangeandstochasticinterestrate AT jinliang onanewcorporatebondpricingmodelwithpotentialcreditratingchangeandstochasticinterestrate AT yuanwu onanewcorporatebondpricingmodelwithpotentialcreditratingchangeandstochasticinterestrate |
_version_ |
1716806603200528384 |