STUDY ON AN AFFINE STRUCTURE MODEL PRICING THE DEFAULTABLE COUPON BOND

摘要

An affine structure model to price defaultable coupon bond with considering the negative correlation between the recovery rate and the default probability is proposed in this paper. By constructing a characteristic function and solving the corresponding Riccati equations, the closed-form solution of the pricing model is gotten. The model also considers the CIR interest rate term structure and adopts the recovery of face value assumption. At last, the result of parameters sensitivity indicates that the proposed model can produce abundant credit spread term structures and that the risk of recovery rate is certainly a systematic risk factor which can bring risk premium.