On a Corporate Bond Pricing Model with Credit Rating Migration Risksand Stochastic Interest Rate

Jin Liang; Hong-Ming Yin; Xinfu Chen; Yuan Wu; Jin Liang; Hong-Ming Yin; Xinfu Chen; Yuan Wu

doi:10.3934/QFE.2017.3.300

Quantitative Finance and Economics

2017, Volume 1, Issue 3: 300-319. doi: 10.3934/QFE.2017.3.300

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On a Corporate Bond Pricing Model with Credit Rating Migration Risksand Stochastic Interest Rate

1.
Department of Mathematics, Tongji University, Shanghai 200092, China
2.
Department of Mathematics and Statistics, Washington State University, Pullman, WA99164, USA
3.
Department of Mathematics, University of Pittsburgh, Pittsburgh, PA 15260,USA
4.
School of Statistics and Mathematics, Shanghai Lixin University of Accounting and Finance,Shanghai 201209, China

Received: 27 July 2017 Accepted: 26 September 2017 Published: 12 October 2017

In this paper we study a corporate bond-pricing model with credit rating migration and a stochastic interest rate. The volatility of bond price in the model strongly depends on potential credit rating migration and stochastic change of the interest rate. This new model improves the previous existing models in which the interest rate is considered to be a constant. The existence, uniqueness and regularity of the solution for the model are established. Moreover, some properties including the smoothness of the free boundary are obtained. Furthermore, some numerical computations are presented to illustrate the theoretical results.
- corporate bond-pricing model,
- credit-Rating migration,
- stochastic interest rate,
- firmasset value
Citation: Jin Liang, Hong-Ming Yin, Xinfu Chen, Yuan Wu. On a Corporate Bond Pricing Model with Credit Rating Migration Risksand Stochastic Interest Rate[J]. Quantitative Finance and Economics, 2017, 1(3): 300-319. doi: 10.3934/QFE.2017.3.300

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Abstract

In this paper we study a corporate bond-pricing model with credit rating migration and a stochastic interest rate. The volatility of bond price in the model strongly depends on potential credit rating migration and stochastic change of the interest rate. This new model improves the previous existing models in which the interest rate is considered to be a constant. The existence, uniqueness and regularity of the solution for the model are established. Moreover, some properties including the smoothness of the free boundary are obtained. Furthermore, some numerical computations are presented to illustrate the theoretical results.

References

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