Defaultable Bonds and Default Correlation

41 Pages Posted: 25 Nov 2002

See all articles by Lara Cathcart

Lara Cathcart

Imperial College Business School

Lina El-Jahel

University of Auckland

Date Written: December 2002


This paper provides a closed form solution for the pricing of defaultable bonds and default correlation. In a stochastic interest rates framework default occurs when the value of the assets of the firm either hits a stochastic boundary of default or according to a stochastic hazard rate. The model combines the advantages of structural and reduced form models and thus generates credit spreads and default correlations consistent with empirical observation.

Suggested Citation

Cathcart, Lara and El-Jahel, Lina, Defaultable Bonds and Default Correlation (December 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: or

Lara Cathcart (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom
+44 (0) 20 7594 9126 (Phone)
+44 (0) 20 7594 9189 (Fax)

Lina El-Jahel

University of Auckland ( email )

12 Grafton Rd
Private Bag 92019
Auckland, 1010
New Zealand

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