Default risk in interest rate derivatives with stochastic volatility

Bomi Kim, Jeong Hoon Kim

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

In this study, we consider short interest rate models of the Vascicek type with stochastic volatility and obtain formulas for default risk in interest rate derivatives. Corrections from a fast mean-reverting stochastic volatility are computed to show how they can affect the term structure of the interest rate derivatives. Our results for the defaultable bonds as well as the corresponding bond options are obtained as an extension of the non-defaultable case studied by Cotton et al. [Math. Finance, 2004, 14(2), 173-200].

Original languageEnglish
Pages (from-to)1837-1845
Number of pages9
JournalQuantitative Finance
Volume11
Issue number12
DOIs
Publication statusPublished - 2011 Dec 1

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Interest rate derivatives
Stochastic volatility
Default risk
Short interest
Finance
Bond options
Defaultable bonds
Interest rate models
Term structure
Mean-reverting

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics, Econometrics and Finance(all)

Cite this

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Default risk in interest rate derivatives with stochastic volatility. / Kim, Bomi; Kim, Jeong Hoon.

In: Quantitative Finance, Vol. 11, No. 12, 01.12.2011, p. 1837-1845.

Research output: Contribution to journalArticle

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