We propose a hierarchical Marshall-Olkin model of countrywide systemic risk. At the lower level, we model the systemic risk of a crisis within the banking system (that we call “within” systemic risk) and at the higher level we model the probability of a joint default of the banking system and the public sector (that we call “between” systemic risk). As for the within systemic risk, we propose a...

Bharath and Shumway (2008) provide evidence that shows that it is the functional form of Merton’s (1974) distance to default (DD) model that makes it useful and important for predicting defaults. In this paper, we investigate whether the default predictability of the Merton DD model would be affected by taking investors’ ambiguity aversion into consideration. The Cox proportional hazard model i...

In credit scoring, low-default portfolios are those for which very little default history exists. This makes it problematic for financial institutions to estimate a reliable probability of a customer defaulting on a loan. Banking regulation (Basel II Capital Accord), and best practice, however, necessitate an accurate and valid estimate of the probability of default. In this article the suitabi...

This paper provides a simple analytic formula for valuing default swaps with correlated market and credit risk. We illustrate the numerical implementation of this model by inferring the default probability parameters implicit in default swap quotes for twenty two companies over the time period 8/21/00 to 10/31/00. For comparison, with also provide implicit estimates for the standard model (a sp...

Discussion Papers are a series of manuscripts in their draft form. They are not intended for circulation or distribution except as indicated by the author. For that reason Discussion Papers may not be reproduced or distributed without the written consent of the author. This paper presents a new approach for modeling an optimal debt contract in continuous time. It examines a competing contract d...

We propose a Bayesian nonparametric model to estimate rating migration matrices and default probabilities using the reinforced urn processes (RUP) introduced in Muliere et al. (2000). The estimated default probability becomes our prior information in a parametric model for the prediction of the number of bankruptcies, with the only assumption of exchangeability within rating classes. The Polya ...

In this paper we consider the following inverse problem for the first hitting time distribution: given a Wiener process with a random initial state, probability distribution, F (t), and a linear boundary, b(t) = μt, find a distribution of the initial state such that the distribution of the first hitting time is F (t). This problem has important applications in credit risk modeling where the pro...

Climate change poses an existential threat to the global economy. While there is a growing body of literature on economic consequences climate change, research link between and sovereign default risk nonexistent. We aim fill this gap in by estimating impact vulnerability resilience probability debt default. Using sample 116 countries over period 1995–2017, we find that have significant effects ...

We apply the density framework developed in [N. El Karoui, M. Jeanblanc, and Y. Jiao, Stochastic Process. Appl., 120 (2010), pp. 1011–1032] to the modeling of successive multiple defaults. Under the hypothesis of existence of the joint density of the ordered default times with respect to a reference filtration, we present general pricing results and establish links with the classical intensity ...

In this paper a simulation approach for defaultable yield curves is developed within the Heath et al. (1992) framework. The default event is modelled using the Cox process where the stochastic intensity represents the credit spread. The forward credit spread volatility function is affected by the entire credit spread term structure. The paper provides the defaultable bond and credit default swa...