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Utility indifference valuation of corporate bond with rating migration risk |
Jin LIANG,Xudan ZHANG( ),Yuejuan ZHAO |
| Department of Mathematics, Tongji University, Shanghai 200092, China |
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Abstract A pricing model for a corporate bond with rating migration risk is established in this article. With the technology of utility-indifference valuation under the Markov-modulated framework, we analyze the price of a multi-rating bond and obtain closed formulae in a three-rating case. Based on the pricing formulae, the impacts of the parameters on the indifference price are analyzed and some reasonable financial explanations are provided as well.
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Utility indifference price
credit rating migration
HJB equation
Markov-modulated
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Corresponding Author(s):
Xudan ZHANG
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Issue Date: 12 October 2015
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