The Pricing of Risky Bonds: Current
Models and Future Directions
Hyungsok Ahn, Varqa Khadem, Paul Wilmott
The modelling of credit risk, credit derivatives and
non-hedgeable securities in general is currently in a poor state. Ideas
from equity options theory have been adopted for credit risk, but have not
been adapted for the peculiarities of this more complex world.
This brief paper
is a review and critique of current
ideas and models, and includes suggestions for a more sophisticated realisitic and ultimately more sensible approach. The bibliography at the
end should provide a useful source for the current state of the art.
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