TITLE:
The Pricing of Credit Derivatives and Estimation of Default Probability
AUTHORS:
Hanghang Zhou, Dianli Zhao
KEYWORDS:
Default Intensity, Bond Pricing, Maximum Likelihood Estimation, Default Probability
JOURNAL NAME:
Journal of Mathematical Finance,
Vol.5 No.3,
July
7,
2015
ABSTRACT: Under the native-born model of default and the circular model of default, we take the price of credit derivatives into account. It’s supposed that the short-term market interest rates are based on Vasicek model in this article. Firstly, we calculate the price of default-free bonds in zero-coupon bond. Then, we give the default-intensity expressions under the two models. We calculate the prices of default-free bonds under the two default models. For different situations, we estimate the parameters by maximum likelihood estimation method and calculate the default probability of the company. From the analysis of the result, we find that the result conforms to reality. So the models of default intensity we suppose in the bond pricing are reasonable.