Journal of Risk

Risk.net

The effects of jump risks associated with the default rate on credit spreads

Chang Mo Ahn, Jangkoo Kang, Hwa-Sung Kim

ABSTRACT

This paper studies credit spreads when the default intensity is affected by jump risks. A simple pricing model for risky bonds is derived using Madan and Unal’s (2000) hybrid model approach where there exist jump risks associated with the factors of the default intensity. Numerical examples provide a comparison of credit spreads induced by jumps with those induced only by diffusive components. The longer the maturity of a bond, the greater is the impact of jumps. Numerical examples also show that the credit spreads for short-term bonds may be significantly overpredicted and those for long-term bonds may be significantly underpredicted if jumps are ignored.

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 Risk.net? View our subscription options

If you already have an account, please sign in here.

You need to sign in to use this feature. If you don’t have a Risk.net 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: