Asymptotic behaviors of a free boundary raised from corporate bond evaluation with credit rating migration risks
Wanying Fu
Lebanon Valley College, Annville, USAXinfu Chen
University of Pittsburgh, USAJin Liang
Tongji University, Shanghai, China
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Abstract
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.
Cite this article
Wanying Fu, Xinfu Chen, Jin Liang, Asymptotic behaviors of a free boundary raised from corporate bond evaluation with credit rating migration risks. Interfaces Free Bound. 22 (2020), no. 3, pp. 285–316
DOI 10.4171/IFB/442