Browsing by Author "Ma, Junchi"

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    Credit Risk Pricing based on Epstein-Zin Preference
    (2019-12-20) Ma, Junchi; Sezer, Deniz; Qiu, Jinniao; Swishchuk, Anatoliy V.; Liao, Wenyuan
    We present a consumption-based equilibrium framework for credit risk pricing in an Epstein-Zin setting. The default time is modeled as the first hitting time of a default boundary. Bond investors have imperfect information about the firm value which is unobservable. The state variables, consumption and volatility are modeled as affine diffusion processes. Using the Epstein-Zin equilibrium solution as the pricing kernel, the price of a zero-coupon bond is expressed as the solution of a system of a two-dimensional parabolic partial differential equation (PDE) which is solved numerically. The price under the imperfect information is derived based on the solution of a stochastic partial differential equation (SPDE). Finally, We analyze the implications of imperfect information and firm parameters on the yield spreads.