The Parameter Sensitivities of a Jump-diffusion Process in Basic Credit Risk Analysis

TL;DR

This paper investigates how parameters affect bond pricing in a credit risk model driven by both continuous and jump processes, providing theoretical analysis and simulation verification.

Contribution

It offers a detailed theoretical analysis of parameter sensitivities in a jump-diffusion credit risk model with explicit formulas and simulation validation.

Findings

Parameter sensitivities are explicitly derived for bond prices.

Matlab simulations confirm theoretical sensitivities.

The model captures discontinuous jump effects in credit risk.

Abstract

We detect the parameter sensitivities of bond pricing which is driven by a Brownian motion and a compound Poisson process as the discontinuous case in credit risk research. The strict mathematical deductions are given theoretically due to the explicit call price formula. Furthermore, we illustrate Matlab simulation to verify these conclusions.