Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility
Quantitative Finance Research Centre Research Paper No. 283
47 Pages Posted: 22 Oct 2010
Date Written: August 1, 2010
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
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