Ratings-Based Pricing and Stochastic Spreads

Risk Control Research Paper No. 8/2

34 Pages Posted: 29 Nov 2011

See all articles by William Robert Maurice Perraudin

William Robert Maurice Perraudin

Risk Control Limited

Robert Lamb

Imperial College London

Mariam Harfush-Pardo

affiliation not provided to SSRN

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

Perraudin, William Robert Maurice and Lamb, Robert and Harfush-Pardo, Mariam, Ratings-Based Pricing and Stochastic Spreads (September 1, 2007). Risk Control Research Paper No. 8/2, Available at SSRN: https://ssrn.com/abstract=1961140 or http://dx.doi.org/10.2139/ssrn.1961140

William Robert Maurice Perraudin (Contact Author)

Risk Control Limited ( email )

13-14 Dean Street
London, SE21 8LU
United Kingdom

Robert Lamb

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Mariam Harfush-Pardo

affiliation not provided to SSRN ( email )