A new model and its numerical method to identify multi credit migration boundaries

ABSTRACT

In this paper, valuation a corporate bond with multi credit rating migration risks is considered under the structure framework by using a free boundary model. The establishment, analysis and calculation of the model are presented. Numerical scheme, stability of the numerical algorithm and convergence order are discussed. Calibration of the parameters and numerical examples are also suggested. Furthermore, the relationship between the value function, the free boundaries and different parameters is shown and analysed.

KEYWORDS:

• Credit rating migration
• credit risk
• structure model
• free boundary
• corporate bond
• firm asset value

2010 MSC SUBJECT CLASSIFICATIONS:

• 35K15
• 35R05
• 65M06
• 91G40

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [No.11671301].