A Dynamic Equilibrium Q Probability Measure for Poisson Yield Spreads – Review of European Corporate Bonds

44 Pages Posted: 24 May 2019

See all articles by John A Thorp

John A Thorp

Regent's University London

Seyedeh Asieh Tabaghdehi

Regents University London

Date Written: April 26, 2019

Abstract

This paper presents a new model for term risk, yield curve, and credit risk in spreads in a unified approach. The originality lies in the structuring of the Poisson stochastic of risk in a form suitable for finding the differential equation for the yield curve and its spreads as the Poisson Yield Spread Model (PYSM). A new P to Q change in measure is found for the purpose of parameterizing the stochastic component of the yield curve, based on a frequency specified version of the single event Poisson process. The PYSM determines the behaviour of discount rates and yield spreads over EU debt risk extremes.

Keywords: yield term structure, arbitrage-free Poisson, forwards-spread model, interest rate AR(1) theory

JEL Classification: C32, D53, E43, G13

Suggested Citation

Thorp, John Anthony and Tabaghdehi, Seyedeh Asieh, A Dynamic Equilibrium Q Probability Measure for Poisson Yield Spreads – Review of European Corporate Bonds (April 26, 2019). Available at SSRN: https://ssrn.com/abstract=3378552 or http://dx.doi.org/10.2139/ssrn.3378552

John Anthony Thorp (Contact Author)

Regent's University London ( email )

Inner Circle, Regent's Park
London NY14NS
United Kingdom

Seyedeh Asieh Tabaghdehi

Regents University London ( email )

Regents Park
Inner Circle
London, NW1 4NS
United Kingdom

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