What is it about?
This study addresses the pricing of defaultable bonds and credit default swaps (CDSs) within a mixed fractional intensity framework incorporating stochastic recovery. The default intensity is modeled using a mixed fractional Cox–Ingersoll–Ross (mfCIR) process, while the recovery rate is formulated as a function of the default intensity. The noise component of the mfCIR model combines fractional Brownian motion (fBm) and a standard Brownian motion, providing a more flexible representation of financial markets. By employing a variable separation technique, the pricing formulae for defaultable bonds and CDSs are derived under the mfCIR model.
Featured Image
Why is it important?
Specifically, a closed-form analytical solution for the mixed fractional intensity model is obtained by analytically solving a backward parabolic partial differential equation analytically, overcoming challenges caused by an additional stochastic factor.
Perspectives
For effective asset allocation and interest rate risk management, policyholders must consider not only the correlation with the default intensity but also the risk associated with recovery rates.
Zhaoqiang Yang
Read the Original
This page is a summary of: A novel analytical pricing of defaultable bonds and CDSs with stochastic recovery in a mixed fractional CIR model, Japan Journal of Industrial and Applied Mathematics, July 2025, Springer Science + Business Media,
DOI: 10.1007/s13160-025-00715-4.
You can read the full text:
Contributors
The following have contributed to this page
