Ratings-Based Pricing and Stochastic Spreads
Risk Control Research Paper No. 8/2
34 Pages Posted: 29 Nov 2011
Date Written: September 1, 2007
Abstract
This paper generalizes a class of ratings-based credit derivative models proposed by Jarrow, Lando, and Turnbull (1997) and Kijima and Komoribayashi (1998) to allow for stochastic spreads and then applies this model to analyze empirically the pricing of large cross sections of corporate bonds and Asset Backed Securities. We show that measuring risk in credit portfolios is highly sensitive to the inclusion of randomness in spreads.
Keywords: credit derivative models, stochastic spreads, corporate bonds, asset backed securities, ABS, risk
JEL Classification: E44
Suggested Citation: Suggested Citation
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