Abstract
We provide an efficient and unbiased Monte-Carlo simulation for the com- putation of bond prices in a structural default model with jumps. The algorithm requires the evaluation of integrals with the density of the first- passage time of a Brownian bridge as the integrand. Metwally and Atiya (2002) suggest an approximation of these integrals. We improve this approx- imation in terms of precision. From a modeler’s point of view, we show that a structural model with jumps is able to endogenously generate stochastic recovery rates. It is well known that allowing a sudden default by a jump results in a positive limit of credit spreads at the short end of the term struc- ture. We provide an explicit formula for this limit, depending only on the L ́evy measure of the logarithm of the firm-value process, the recovery rate, and the distance to default.
Authors
Johannes Ruf, Matthias Scherer
Year
2011
Journal
The Journal of Computational Finance, (14)3, 127.
Keywords
Complex issues, Complex networks, Complex Systems, and Computational Finance