Abstract
For the purposes of this article, first, we will estimate the term structure of credit spreads results from the possibility of future defaults of firms. It is assumed that credit risk is specified as a discrete-state Markov chain, constructed as a model which can be used to estimate the baseline transition matrix of the credit-rating class, recovery amount, and risk-adjusting factors from yield spreads for every rating. This enables us to compute the implied term structure from market data. Next, we will provide a valuation model for downgrade protection.
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Aonuma, K. An evaluation model for downgrade protection. Japan J. Indust. Appl. Math. 18, 627–646 (2001). https://doi.org/10.1007/BF03167408
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DOI: https://doi.org/10.1007/BF03167408