Abstract
Under the native-born model of default and the circular model of default, we take the price of credit derivatives into account. It’s supposed that the short-term market interest rates are based on Vasicek model in this article. Firstly, we calculate the price of default-free bonds in zero-coupon bond. Then, we give the default-intensity expressions under the two models. We calculate the prices of default-free bonds under the two default models. For different situations, we estimate the parameters by maximum likelihood estimation method and calculate the default probability of the company. From the analysis of the result, we find that the result conforms to reality. So the models of default intensity we suppose in the bond pricing are reasonable.
Highlights
In the end of the 20th century, credit derivatives are developed as a way to transfer the credit risk of financial products, their value is developed from the bonds and other financial assets
We find that the interest rates are always r hovered around b
This article explores the market short-term interest rates which conform to the Vasicek model
Summary
In the end of the 20th century, credit derivatives are developed as a way to transfer the credit risk of financial products, their value is developed from the bonds and other financial assets. The value of credit dervatives is to restructure credit risk At the earliest, it appeared in the form of credit default swaps which were derived from corporate bonds. When talking about the bonding pricing, we can consider it in the case of recovery rate, default time and market risk-free interest rate. The interest rate submits to the Vasicek model We first suppose their respective default intensity and calculate the default-free bond price of zero-coupon bond. While we calculate the probability of default, Duffie, Saita and Wang [10] proposed the maximum likelihood estimation method to obtain the companies’ probability of default According to this method, under the default framework, we first estimate the parameters of stochastic intensity which we suppose. It is concluded that the parameters which we suppose are reasonable
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