3 June 2005
Modelling Credit Spread, Implied Volatility, and Optimal Capital Structure with Endogenous Default and Jump Risk
We propose a model for credit risk with endogenous default and jump risk. The model has four attractive features. <ol> <li>It can generate flexible credit spread curves. </li> <li>It leads to flexible implied volatility curves, thus providing a link between credit spread and implied volatility. </li> <li>It implies that high tech firms tend to have very little debts. </li> <li>It yields analytical solutions for debt and equity values. </li> </ol> This is a joint work with Nan Chen (a Ph.D. student at Columbia University).
- Mathematical Finance Seminar