Credit Risk Pricing based on Epstein-Zin Preference

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.

Name thesis:degree_name

Master of Science (MSc)

Discipline thesis:degree_discipline

Mathematics & Statistics

Grantor dc:publisher.institution

Science

Year dc:date.issued

2019

Author dc:creator

• Ma, Junchi

Advisor dc:contributor.advisor

• Sezer, Deniz

Committee members dc:contributor.committeemember

• Qiu, Jinniao
• Swishchuk, Anatoliy V.
• Liao, Wenyuan

• Epstein-Zin preference
• Imperfect information
• Stochastic partial differential equation

Statement dc:rights

• University of Calgary graduate students retain copyright ownership and moral rights for their thesis. You may use this material in any way that is permitted by the Copyright Act or through licensing that has been assigned to the document. For uses that are not allowable under copyright legislation or licensing, you are required to seek permission.

Language dc:language.iso

eng

DOI

http://dx.doi.org/10.11575/PRISM/37369

OAI identifier oai:identifier

oai:ucalgary.scholaris.ca:1880/111383