Asymptotic Expansion for Term Structures of Defaultable Bonds with Non-Gaussian Dependent Innovations

Masakazu Miura, Kenichiro Tamaki, Takayuki Shiohama

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In the context of credit risk, the term structure models that have been studied in the literature are typically models driven by Brownian motion or standard jump diffusions. These models provide coherent modeling that is straightforward to implement. To make these models more flexible, we develop a discrete-time approximation of a continuous-time Vasicek term structure analysis with non-Gaussian and dependent innovations. Higher-order asymptotic theory enables us to evaluate the term structures of defaultable bonds. Numerical examples show that the effects of non-Gaussianity and the dependency of both risk-free rate and default process strongly influence the evaluation of defaultable bonds. As an application, we estimate the parameters of our proposed models for the Japanese corporate credit default swap market.

Original languageEnglish
Pages (from-to)311-344
Number of pages34
JournalAsia-Pacific Financial Markets
Volume20
Issue number4
DOIs
Publication statusPublished - 2013 Apr 9

Keywords

  • Credit risk
  • Edgeworth expansion
  • Short rates
  • Term structure
  • Vasicek model

ASJC Scopus subject areas

  • Finance

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