A Study Of Credit Risk Valuation Model With Continuous-time Liquidation

After studying Chen and Panjer’s paper[18],we found that their assumption of liquidating at the maturity wasn’t consistent with the market,which may cause considerable impact on the valuation.We modify the corporate bond price model with continuous-time liquidation by introducing a liquidation factor.A bridge between ruin theory and credit risk is constructed by showing the mathematical equivalence between the surplus process and the solvency ratio process.Under the assumption of Log-exponentially distributed jumps,the closed-form solutions of the probability of default and the recovery rate when the default is caused by a jump with continuous-time liquidation is obtained.The implied jump size distribution is found through the market credit spread.The probability of default caused by a jump is obtained.Finally,we give a theoretical groundwork for credit ratings using ruin theory.