Term Structure Of Credit Spread And Credit Spread Option Pricing Based On A Jump-diffusion Interest Rate Model

Defaultable bond/corporation bond will get a rapid increase in China's bond mar-ket. Credit spread is the difference in yield between different securities, due to different credit quality. The credit spread reflects the additional net yield an investor can earn from a security with more credit risk relative to one with less credit risk.It is very essential to analyze term structure of credit spread. In this article, we select data from European bond market, and use these data to estimate recovery rate:8 and jump intensity:q. Furthermore, we apply ARIMA model to forecast single defaultable bond's credit spread. Finally, we give the pricing formula of credit spread option based on the jump-diffusion model.From this article, we learn that defaultable bond enjoys a great premium in bond market. And different bonds sorted by industry have different yield curve and default probability. We also try to use economic theory to explain this phenomenon.