Defaultable bond pricing under the jump diffusion model with copula dependence structure
We study the pricing of a defaultable bond under various dependence structure captured by copulas. For that purpose, we use a bivariate jump-diffusion process to represent a bond issuer’s default intensity and the market short rate of interest. We assume that each jump of both variables occur simu...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
Penerbit Universiti Kebangsaan Malaysia
2020
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| Online Access: | http://journalarticle.ukm.my/15365/ http://journalarticle.ukm.my/15365/1/23.pdf |
| _version_ | 1848813783102783488 |
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| author | Siti Norafidah Mohd Ramli, Jang, Jiwook |
| author_facet | Siti Norafidah Mohd Ramli, Jang, Jiwook |
| author_sort | Siti Norafidah Mohd Ramli, |
| building | UKM Institutional Repository |
| collection | Online Access |
| description | We study the pricing of a defaultable bond under various dependence structure captured by copulas. For that purpose,
we use a bivariate jump-diffusion process to represent a bond issuer’s default intensity and the market short rate of
interest. We assume that each jump of both variables occur simultaneously, and that their sizes are dependent. For these
simultaneous jumps and their sizes, a homogeneous Poisson process and three copulas, which are a Farlie-Gumbel-
Morgenstern copula, a Gaussian copula, and a Student t-copula are used, respectively. We use the joint Laplace transform
of the integrated risk processes to obtain the expression of the defaultable bond price with copula-dependent jump sizes.
Assuming exponential marginal distributions, we compute the zero coupon defaultable bond prices and their yields using
the three copulas to illustrate the bond. We found that the bond price values are the lowest under the Student-t copula,
suggesting that a dependence structure under the Student-t copula could be a suitable candidate to depict a riskier
environment. Additionally, the hypothetical term structure of interest rates under the risky environment are also upward
sloping, albeit with yields greater than 100%, reflecting a higher compensation required by investors to lend funds for
a longer period when the financial market is volatile. |
| first_indexed | 2025-11-15T00:23:40Z |
| format | Article |
| id | oai:generic.eprints.org:15365 |
| institution | Universiti Kebangasaan Malaysia |
| institution_category | Local University |
| language | English |
| last_indexed | 2025-11-15T00:23:40Z |
| publishDate | 2020 |
| publisher | Penerbit Universiti Kebangsaan Malaysia |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | oai:generic.eprints.org:153652020-10-16T01:20:01Z http://journalarticle.ukm.my/15365/ Defaultable bond pricing under the jump diffusion model with copula dependence structure Siti Norafidah Mohd Ramli, Jang, Jiwook We study the pricing of a defaultable bond under various dependence structure captured by copulas. For that purpose, we use a bivariate jump-diffusion process to represent a bond issuer’s default intensity and the market short rate of interest. We assume that each jump of both variables occur simultaneously, and that their sizes are dependent. For these simultaneous jumps and their sizes, a homogeneous Poisson process and three copulas, which are a Farlie-Gumbel- Morgenstern copula, a Gaussian copula, and a Student t-copula are used, respectively. We use the joint Laplace transform of the integrated risk processes to obtain the expression of the defaultable bond price with copula-dependent jump sizes. Assuming exponential marginal distributions, we compute the zero coupon defaultable bond prices and their yields using the three copulas to illustrate the bond. We found that the bond price values are the lowest under the Student-t copula, suggesting that a dependence structure under the Student-t copula could be a suitable candidate to depict a riskier environment. Additionally, the hypothetical term structure of interest rates under the risky environment are also upward sloping, albeit with yields greater than 100%, reflecting a higher compensation required by investors to lend funds for a longer period when the financial market is volatile. Penerbit Universiti Kebangsaan Malaysia 2020-04 Article PeerReviewed application/pdf en http://journalarticle.ukm.my/15365/1/23.pdf Siti Norafidah Mohd Ramli, and Jang, Jiwook (2020) Defaultable bond pricing under the jump diffusion model with copula dependence structure. Sains Malaysiana, 49 (4). pp. 941-952. ISSN 0126-6039 http://www.ukm.my/jsm/malay_journals/jilid49bil4_2020/KandunganJilid49Bil4_2020.html |
| spellingShingle | Siti Norafidah Mohd Ramli, Jang, Jiwook Defaultable bond pricing under the jump diffusion model with copula dependence structure |
| title | Defaultable bond pricing under the jump diffusion model with copula dependence structure |
| title_full | Defaultable bond pricing under the jump diffusion model with copula dependence structure |
| title_fullStr | Defaultable bond pricing under the jump diffusion model with copula dependence structure |
| title_full_unstemmed | Defaultable bond pricing under the jump diffusion model with copula dependence structure |
| title_short | Defaultable bond pricing under the jump diffusion model with copula dependence structure |
| title_sort | defaultable bond pricing under the jump diffusion model with copula dependence structure |
| url | http://journalarticle.ukm.my/15365/ http://journalarticle.ukm.my/15365/ http://journalarticle.ukm.my/15365/1/23.pdf |