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Interfaces and Free Boundaries


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Volume 22, Issue 3, 2020, pp. 285–316
DOI: 10.4171/IFB/442

Published online: 2020-09-01

Asymptotic behaviors of a free boundary raised from corporate bond evaluation with credit rating migration risks

Wanying Fu, Xinfu Chen[1] and Jin Liang[2]

(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