Interfaces and Free Boundaries
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Published online: 2020-09-01
Asymptotic behaviors of a free boundary raised from corporate bond evaluation with credit rating migration risksWanying Fu, Xinfu Chen and Jin Liang (1) University of Pittsburgh, USA
(2) Tongji University, Shanghai, China
In this paper, we study asymptotic behaviors of a free boundary raised from the evaluation of a corporate bond subject to credit rating changes of the underlying company. The credit rating migration is modeled by a free boundary which separates different credit rating regions in a state space. We first formulate the mathematical problem and then establish the well-posedness of the problem and the long time-to-expiry behavior of the solution. As a result, we describe the location and asymptotic line of the free boundary. We also provide certain numerical simulations.
Keywords: Credit rating, corporate bond, free boundary, asymptotic behavior
Fu Wanying, Chen Xinfu, Liang Jin: Asymptotic behaviors of a free boundary raised from corporate bond evaluation with credit rating migration risks. Interfaces Free Bound. 22 (2020), 285-316. doi: 10.4171/IFB/442