Chen, S.N., Hsu, P.P. and Li, C.Y. (2016) Pricing Credit-Risky Bonds and Spread Options Modelling Credit-Spread Term Structures with Two-Dimensional Markov-Modulated Jump-Diffusion. Quantitative Finance, 16, 573-592.
https://doi.org/10.1080/14697688.2015.1058520

has been cited by the following article:

• TITLE: A Stochastic Correlation Model with Time Change for Pricing Credit Spread Options

  AUTHORS: Zhigang Tong, Allen Liu

  KEYWORDS: Stochastic Correlation, Jacobi Process, Stochastic Time Change, Eigenfunction Expansion, Credit Spread Options

  JOURNAL NAME: Journal of Mathematical Finance, Vol.7 No.2, May 31, 2017

  ABSTRACT: In this paper, we introduce the stochastic correlation processes for modeling the credit spread. We first model the components of spread process as correlated Ornstein-Uhlenbeck processes and correlation as Jacobi process. Using the properties of Jacobi process, we are able to obtain the analytical solutions for the credit spread option prices. To further enhance the model’s ability to capture the abrupt changes in the observed correlation time series, we construct a new model where the correlation is modeled by a Jacobi process time change by Lévy subordinators. We employ the eigenfunction expansion methods to obtain the closed-form solutions for the option prices. Our empirical study indicates the time changed Jacobi process fits the correlation series significantly better than the Jacobi process.