The credit-risk model of Jarrow, Lando, and Turnbull identifies the evolution of a firm's credit rating over time with some Markov chain. Based on this appealing economic interpretation it is possible to valuate defaultable bonds and credit derivatives. The resulting prices explicitly depend on the initial rating and possible rating transition of the reference firm in the future. The required martingale probabilities are obtained from empirical transition probabilities which are adjusted by some risk premium.      «

The credit-risk model of Jarrow, Lando, and Turnbull identifies the evolution of a firm's credit rating over time with some Markov chain. Based on this appealing economic interpretation it is possible to valuate defaultable bonds and credit derivatives. The resulting prices explicitly depend on the initial rating and possible rating transition of the reference firm in the future. The required martingale probabilities are obtained from empirical transition probabilities which are adjusted by some...     »