Adv. Math. Econ. Volume 1, pp.8397 (1999)
Evaluation of yield spread for credit risk
Hiroshi Shirakawa
Department of Industrial Engineering and Management, Tokyo Institute of Technology, 2121 OhOkayama, Meguroku, Tokyo 1528552, Japan


We study the rational evaluation of yield spread for defaultable credit
with fixed maturity. The default occurs when the asset value hits a given fraction of
the nominal credit value. The yield spread is continuously accumulated to the initial
credit as an insurance fee for future default. By the rational credit pricing, we prove
the unique existence of equilibrium yield spread which satisfies the arbitrage free
property. Furthermore we show that this spread yield is independent of the choice of
interest rate process. For the quantitative study of rational yield spread, we derive
an explicit analytic formula for the equilibrium and show numerical example for
various parameters.


Credit risk, yield spread, balance sheet, equivalent martingale measure, sensitivity analysis.