scholarly journals Default Ambiguity

Risks ◽  
2019 ◽  
Vol 7 (2) ◽  
pp. 64
Author(s):  
Tolulope Fadina ◽  
Thorsten Schmidt
Keyword(s):  
Credit Risk ◽  
Term Structure ◽  
Market Value ◽  
Forward Rate ◽  
Term Structure Models ◽  
Default Intensity ◽  
Drift Conditions

This paper discusses ambiguity in the context of single-name credit risk. We focus on uncertainty in the default intensity but also discuss uncertainty in the recovery in a fractional recovery of the market value. This approach is a first step towards integrating uncertainty in credit-risky term structure models and can profit from its simplicity. We derive drift conditions in a Heath–Jarrow–Morton forward rate setting in the case of ambiguous default intensity in combination with zero recovery, and in the case of ambiguous fractional recovery of the market value.

scholarly journals Term structure modeling under volatility uncertainty

2021 ◽  
Author(s):  
Julian Hölzermann
Keyword(s):  
Brownian Motion ◽  
Term Structure ◽  
Market Price ◽  
Forward Rate ◽  
Traditional Model ◽  
Diffusion Term ◽  
Market Prices ◽  
Term Structure Models ◽  
Drift Condition ◽  
Term Structure Modeling

AbstractIn this paper, we study term structure movements in the spirit of Heath et al. (Econometrica 60(1):77–105, 1992) under volatility uncertainty. We model the instantaneous forward rate as a diffusion process driven by a G-Brownian motion. The G-Brownian motion represents the uncertainty about the volatility. Within this framework, we derive a sufficient condition for the absence of arbitrage, known as the drift condition. In contrast to the traditional model, the drift condition consists of several equations and several market prices, termed market price of risk and market prices of uncertainty, respectively. The drift condition is still consistent with the classical one if there is no volatility uncertainty. Similar to the traditional model, the risk-neutral dynamics of the forward rate are completely determined by its diffusion term. The drift condition allows to construct arbitrage-free term structure models that are completely robust with respect to the volatility. In particular, we obtain robust versions of classical term structure models.

Risk Premia and Wishart Term Structure Models

2010 ◽  
Author(s):  
Carl Chiarella ◽  
Chih-Ying Hsiao ◽  
Thuy Duong To
Keyword(s):  
Term Structure ◽  
Risk Premia ◽  
Term Structure Models
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