Mathematical Problems in Engineering
Volume 2011 (2011), Article ID 412565, 16 pages
doi:10.1155/2011/412565
Research Article

The Intensity Model for Pricing Credit Securities with Jump Diffusion and Counterparty Risk

Department of Mathematics, Shanghai Jiaotong University, Shanghai 200240, China

Received 15 January 2011; Accepted 21 February 2011

Academic Editor: Moran Wang

Copyright © 2011 Ruili Hao and Zhongxing Ye. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

We present an intensity-based model with counterparty risk. We assume the default intensity of firm depends on the stochastic interest rate driven by the jump-diffusion process and the default states of counterparty firms. Furthermore, we make use of the techniques in Park (2008) to compute the conditional distribution of default times and derive the explicit prices of bond and CDS. These are extensions of the models in Jarrow and Yu (2001).