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Bond Pricing and the Term Structure of Interest Rates: A Discrete Time Approximation
Abstract This paper studies the binomial approximation to the continuous trading term structure model of Heath, Jarrow, and Morton (1987). The discrete time approximation makes the original
Pricing Derivatives on Financial Securities Subject to Credit Risk
This article provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the
Bankruptcy Prediction With Industry Effects
This paper investigates the forecasting accuracy of bankruptcy hazard rate models for U.S. companies over the time period 1962–1999 using both yearly and monthly observation intervals. The
A Markov Model for the Term Structure of Credit Risk Spreads
This paper provides a Markov model for the term structure of credit risk spreads. The model is based on Jarrow and Turnbull (1995) with the bankruptcy process following a discrete state space Markov
Counterparty Risk and the Pricing of Defaultable Securities
Motivated by recent financial crises in East Asia and the U.S. where the downfall of a small number of firms had an economy-wide impact, this paper generalizes existing reduced-form models to include
Liquidity risk and arbitrage pricing theory
This work extends the classical approach to financial markets by formulating a new model that takes into account illiquidities, which leads to a new definition of a self-financing trading strategy, additional restrictions on hedging strategies, and some interesting mathematical issues.
Pricing Treasury Inflation Protected Securities and Related Derivatives using an HJM Model
Abstract This paper uses an HJM model to price TIPS and related derivative securities. First, using the market prices of TIPS and ordinary U.S. Treasury securities, both the real and nominal
We derive alternative representations of the McKean equation for the value of the American put option. Our main result decomposes the value of an American put option into the corresponding European