Stochastic volatility asymptotics of defaultable interest rate derivatives under a quadratic Gaussian model

Stochastic volatility of underlying assets has been shown to affect significantly the price of many financial derivatives. In particular, a fast mean-reverting factor of the stochastic volatility plays a major role in the pricing of options. This paper deals with the interest rate model dependence of the stochastic volatility impact on defaultable interest rate derivatives. We obtain an asymptotic formula of the price of defaultable bonds and bond options based on a quadratic term structure model and investigate the stochastic volatility and default risk effects and compare the results with those of the Vasicek model.