Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility

Quantitative Finance Research Centre Research Paper No. 283

47 Pages Posted: 22 Oct 2010

See all articles by Carl Chiarella

Carl Chiarella

University of Technology, Sydney - UTS Business School, Finance Discipline Group

Samuel Chege Maina

University of Technology Sydney (UTS) - School of Finance and Economics

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School; Financial Research Network (FIRN)

Date Written: August 1, 2010

Abstract

This paper presents a class of defaultable term structure models within the HJM framework with stochastic volatility. Under certain volatility specifications, the model admits finite dimensional Markovian structures and consequently provides tractable solutions for interest rate derivatives. We also investigate the effect of stochastic volatility and of correlation between the stochastic volatility and credit spreads on the defaultable short rate and defaultable bond prices.

Keywords: stochastic volatility, Heath-Jarrow-Morton model, defaultable forward rates, credit spreads

Suggested Citation

Chiarella, Carl and Maina, Samuel Chege and Sklibosios Nikitopoulos, Christina, Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility (August 1, 2010). Quantitative Finance Research Centre Research Paper No. 283, Available at SSRN: https://ssrn.com/abstract=1695295 or http://dx.doi.org/10.2139/ssrn.1695295

Carl Chiarella (Contact Author)

University of Technology, Sydney - UTS Business School, Finance Discipline Group ( email )

PO Box 123
Broadway, NSW 2007
Australia
+61 2 9514 7719 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://www.business.uts.edu.au/finance/

Samuel Chege Maina

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

Christina Sklibosios Nikitopoulos

University of Technology Sydney - Business School ( email )

15 Broadway, Ultimo
Sydney 2007, New South Wales
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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