Journal of Computational Finance

Pricing corporate bonds in an arbitrary jump-diffusion model based on an improved Brownian-bridge algorithm

Johannes Ruf, Matthias Scherer


We provide an efficient and unbiased Monte Carlo simulation for the computation of bond prices in a structural default model with jumps. The algorithm requires the evaluation of integrals with the density of the first-passage time of a Brownian bridge as the integrand. Metwally and Atiya suggest an approximation of these integrals. We improve this approximation in terms of precision. We show, from a modeling point of view, that a structural model with jumps is able to endogenously generate stochastic recovery rates. It is well known that allowing a sudden default by a jump results in a positive limit of credit spreads at the short end of the term structure. We provide an explicit formula for this limit, depending only on the Lévy measure of the logarithm of the firm-value process, the recovery rate and the distance to default.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to View our subscription options

You need to sign in to use this feature. If you don’t have a account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here