A Default Risk Model under Macroeconomic Conditions

Markovian Defaultable HJM Term Structure Models with Unspanned Stochastic Volatility

We address the problem of pricing defaultable bonds in a Markov modulated market. Using Merton's structural approach we show that various types of defaultable bonds are combination of European type contingent claims. Thus pricing a defaultable bond is tantamount to pricing a contingent claim in a Markov modulated market. Since the market is incomplete, we use the method of quadratic hedging and minimal martingale measure to derive locally risk minimizing derivative prices, hedging strategies and the corresponding residual risks. The price of defaultable bonds are obtained as solutions to a system of PDEs with weak coupling subject to appropriate terminal and boundary conditions. We solve the system of PDEs numerically and carry out a numerical investigation for the defaultable bond prices. We compare their credit spreads with some of the existing models. We observe higher spreads in the Markov modulated market. We show how business cycles can be easily incorporated in the proposed framework. We demonstrate the impact on spreads of the inclusion of rare states that attempt to capture a tight liquidity situation. These states are characterized by low risk-free interest rate, high payout rate and high volatility.

this paper we present a tree model for defaultable bond prices which can be used for the pricing of credit derivatives. The model is based upon the two-factor Hull-White (1994) model for default-free interest rates, where one of the factors is taken to be the credit spread of the defaultable bond prices. As opposed to the tree model of Jarrow and Turnbull (1992), the dynamics of default-free interest rates and credit spreads in this model can have any desired degree of correlation, and the model can be fitted to any given term structures of default-free and defaultable bond prices, and to the term structures of the respective volatilities. Furthermore the model can accommodate several alternative models of default recovery, including the fractional recovery model of Duffie and Singleton (1994) and recovery in terms of equivalent default-free bonds (see e.g. Lando (1998)). Although based on a Gaussian setup, the approach can easily be extended to non-Gaussian processes that avoid negative interest-rates or credit spreads

Classical theory for systems of the first order partial differential equations for a scalar function can be rephrased as the submanifold theory of contact manifolds (geometric first order jet spaces). In the same spirit, we will develop the geometric theory of systems of partial differential equations of second order for a scalar function as the Contact Geometry of Second Order, following E. Cartan.We will formulate the submanifold theory of second order jet spaces as the geometry of PD manifolds (R;D 1 ,D 2 ) of second order. Moreover we will establish the First Reduction Theorem for (R;D 1,D 2) admitting non-trivial Cauchy characteristic systems. By utilizing Parabolic Geometry, we will give, directly or combined with reduction theorems, several classes of systems of partial differential equations of second order, for which the model equation of each class admits the Lie algebra of infinitesimal contact transformations, which is finite dimensional and simple.

Exact solutions of some nonlinear systems of partial differential equations by using the first integral method

A method for reducing systems of partial differential equations to corresponding systems of ordinary differential equations is proposed. A system of equations describing two-dimensional, cylindrical, and spherical flows of a polytropic gas; a system of dimensionless Stokes equations for the dynamics of a viscous incompressible fluid; a system of Maxwell’s equations for vacuum; and a system of gas dynamics equations in cylindrical coordinates are studied. It is shown how this approach can be used for solving certain problems (shockless compression, turbulence, etc.).

Purpose This study investigates the impact of macroeconomic growth conditions and uncertainties on the leverage speed of adjustment (SOA) of corporate firms in the context of an emerging economy. Design/methodology/approach Using the dynamic panel estimators and panel data of 1,134 manufacturing firms listed with the S&P Bombay Stock Exchange from 2007 to 2024. We empirically analyse the effects of high (low) growth macroeconomic conditions of GDP growth, inflation rate, security market, bond market, real interest rate and credit spreads on leverage adjustment. Additionally, we analysed the effect of economic crises and policy uncertainties on target leverage adjustments. Findings This study report evidences that macroeconomic conditions affect the target leverage adjustment of Indian firms. Firms tend to increase (decrease) their leverage SOA in high (low) growth conditions. During the economic crises and policy uncertainties, firms tend to increase their leverage SOA, which suggest that facing macroeconomic uncertainties, firms increase leverage SOA to encounter the cash flow issues and remain financially flexible. Research limitations/implications This study provides important insights to stakeholders and policymakers to make sustainable financial decisions. The findings of this study can be generalizable to other industries or economies by incorporating their idiosyncratic characteristics. Originality/value The present study makes a novel contribution to the literature by analysing the leverage adjustment behaviour of firms in both macroeconomic growth and uncertainty conditions, which provide a new insight into capital structure dynamics for emerging markets.

Recent events have highlighted the potential importance of nonlinear efiects of flscal variables (notably debt and deflcits) on interest rates: While in times when government solvency is not a concern the standard crowding-out efiects are of moderate magnitude, in times when default risk becomes an issue the interest rate efiects can become very large. This paper provides new evidence on the magnitude of these efiects. For the case when default risk is not a concern, it uses an arbitrage-free term structure model to estimate the dynamic efiects of flscal policy shocks on interest rates along the entire maturity spectrum. For the case when default risk becomes a concern (thereby violating a central assumption of the term structure model), I present evidence based on EMU government bond spread regressions on time-varying efiects of national flscal policies on spreads as well as the time-varying sensitivity of yield spreads to international risk aversion as a function of the state of flscal policy. JEL classiflcation: E6, H6.

For a class of nonlinear systems of partial differential equations of high order in a cylindrical domain the following boundary value problem is considered: Cauchy-type conditions are prescribed on the upper and lower bases of the cylinder, and a Robin-type condition is prescribed on the lateral part of the boundary. This boundary value problem is reduced in an equivalent way to a nonlinear functional equation in a certain subspace of the Sobolev space. Under certain assumptions about the nonlinear terms an a priori estimate is obtained for the solution of the problem in question and the existence of the solution is established, while in the case when these conditions fail, the absence of a solution is established. The question of uniqueness is also discussed for the solution. Bibliography: 18 titles.

A mathematical model for fluid transport in peritoneal dialysis is constructed. The model is based on a nonlinear system of two-dimensional partial differential equations with corresponding boundary and initial conditions. Using the classical Lie scheme, we establish that the base system of partial differential equations (under some restrictions on coefficients) is invariant under the infinite-dimensional Lie algebra, which enables us to construct families of exact solutions. Moreover, exact solutions with a more general structure are found using another (non-Lie) technique. Finally, it is shown that some of the solutions obtained describe the hydrostatic pressure and the glucose concentration in peritoneal dialysis.

The method of Lyapunov functions is used to investigate the stability of systems with distributed and lumped parameters, described by linear partial and ordinary differential equations. The original high-order partial differential equations are represented by a first-order system of partial differential evolution equations and constraint equations; to do that, we introduce additional variables. Passing to the first-order system of partial differential equations and representing ordinary differential equations in the normal Cauchy form, we obtain a possibility to construct the Lyapunov function as a sum of integral and classical quadratic forms and develop general methods of the investigation of the stability of a broad class of systems with distributed and lumped parameters. For example, we consider the stability of the work of the wind-driven lift pump and take into account the elasticity of the shaft transmitting the torque from the wind engine to the pump.

A new family of exact solutions to the unsteady Navier–Stokes equations using canonical transformation with complex coefficients

Singular perturbation problems for systems of partial differential equations of elliptic type

Existence of series solutions for certain nonlinear systems of time fractional partial differential equations

Kranc: a Mathematica package to generate numerical codes for tensorial evolution equations