A tractable LIBOR model with default risk

DOI10.1007/S11579-012-0090-5zbMATH Open1269.91093arXiv1202.0587OpenAlexW2149865189MaRDI QIDQ356479FDOQ356479

Authors: Zorana Grbac, Antonis Papapantoleon 

Publication date: 25 July 2013

Published in: Mathematics and Financial Economics (Search for Journal in Brave)

Abstract: We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formulas for CDS spreads, while semi-analytical formulas are derived for other credit derivatives. Finally, we give an application to counterparty risk.

Full work available at URL: https://arxiv.org/abs/1202.0587

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zbMATH Keywords

default riskcounterparty riskaffine processesaffine LIBOR modelsanalytically tractable modelsCDS spreadLIBOR rates

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Credit risk (91G40) Martingales with continuous parameter (60G44) Interest rates, asset pricing, etc. (stochastic models) (91G30)

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Cited In (8)

• A multiple curve Lévy swap market model
• A general HJM framework for multiple yield curve modelling
• The affine LIBOR models
• Interbank credit risk modeling with self-exciting jump processes
• DEFAULTABLE LÉVY LIBOR RATES AND CREDIT DERIVATIVES
• Affine LIBOR models with multiple curves: theory, examples and calibration
• A Unified View of LIBOR Models
• The affine inflation market models

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