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Special Semester on Stochastics with Emphasis on Finance
Linz, September 2008 - December 2008
Presentation: Credit rating-based Lévy Libor model

Workshop: Concluding Workshop

Time: Wed, December 03, 2008, 15:30-16:00

Speaker: Zorana Grbac

Abstract

We present an extension of the Lévy Libor model to the multiple credit rating setting. The dynamics of default-free Libor rates and the dynamics of spreads for each rating class are specified, starting with a time-inhomogeneous Lévy process as driving process. We derive conditions for this model to be arbitrage-free and prove that rating-sensitive Libor rates evolve as martingales under appropriately chosen forward measures. We study the pricing problem for certain credit derivatives in this setting and provide pricing formulae in some special cases. This is joint work with Ernst Eberlein.

Presentation slides (pdf, 349 KB)

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