The Extended Geske-Johnson Model and Its Consistency with Reduced Form Models
by Ren-raw Chen of Rutgers University
October 24, 2003
Abstract: In this paper, we extend the Geske-Johnson model (1984) to multiple periods ( n > 2 ) and to incorporate random interest rates. We derive similar quasi closed form solutions to the ones in Geske (1977) and Geske and Johnson (1984). Furthermore, we show that an externally specified default barrier can potentially generate internal inconsistency. Finally, we show that the extended Geske-Johnson model can be compared with reduced form models in a discretized, binomial framework. This result makes comparison of various models empirically possible. We demonstrate, with a credit derivative example, how different recovery assumptions impact the derivative prices.
Previously titled: Credit Risk Modeling: A General Framework