Unified Credit-Equity Modeling

Vadim Linetsky*, Rafael Mendoza-Arriaga

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingChapter

3 Scopus citations

Abstract

This chapter surveys a modeling framework for the unified valuation of corporate debt, credit, and equity derivatives.In this framework, the defaultable stock price is seen as the fundamental observable state variable. Corporate debt, credit, and equity derivatives on a given firm are seen as contingent claims on the defaultable stock. We model the defaultable stock price as a jump-to-default extended diffusion. In particular, we survey the jump-todefault extended constant elasticity of variance (JDCEV) model of Carr and Linetsky (2006) and the time-changed JDCEV model of Mendoza-Arriaga, Carr, and Linetsky (2009) with state-dependent jumps exhibiting leverage effect and stochastic volatility.

Original languageEnglish (US)
Title of host publicationCredit Risk Frontiers
Subtitle of host publicationSubprime Crisis, Pricing and Hedging, CVA, MBS, Ratings, and Liquidity
PublisherJohn Wiley and Sons
Pages553-583
Number of pages31
ISBN (Print)9781576603581
DOIs
StatePublished - Sep 7 2012

Keywords

  • Credit default swaps
  • Credit derivatives
  • Credit-equity model
  • Equity default swaps
  • Equity derivatives

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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