Defaultable bonds with an infinite number of Levy factors
Jacek Jakubowski, Mariusz Nieweglowski
TL;DR
This paper develops a comprehensive model for defaultable bonds driven by infinite Levy factors within a Heath-Jarrow-Morton framework, incorporating rating migrations and various recovery types, establishing conditions for arbitrage-free markets.
Contribution
It introduces a generalized HJM framework with infinite Levy factors and rating migrations, providing necessary and sufficient conditions for arbitrage-free markets.
Findings
Derived generalized HJM conditions for arbitrage-free markets
Analyzed impact of rating migrations on bond dynamics
Explored different recovery mechanisms in the model
Abstract
A market with defaultable bonds where the bond dynamics is in a Heath-Jarrow-Morton setting and the forward rates are driven by an infinite number of Levy factors is considered. The setting includes rating migrations driven by a Markov chain. All basic types of recovery are investigated. We formulate necessary and sufficient conditions (generalized HJM conditions) under which the market is arbitrage free. Connections with consistency conditions are discussed.
Peer Reviews
No public reviews on file for this paper yet. If you reviewed it on a platform where reviews are public (OpenReview, ICLR, NeurIPS, ICML), you can paste yours below so the community can read it here.
Videos
No videos yet. Explain this paper in a talk, walkthrough, or lecture? Add one.
Taxonomy
TopicsCredit Risk and Financial Regulations · Stochastic processes and financial applications · Financial Markets and Investment Strategies