Dividing the total portfolio (parent) into non-overlapping sub-portfolios (children), and assuming homogeneity for both the parent and the children, we use a top-down dynamic default intensity model for the parent, and specify the conditional probability of default in the children given imminent default in the parent. We consider two fundamental cases which are building blocks of more complex a...

The forward-intensity model of Duan, et al (2012) has proved to be a parsimonious and practical way for predicting corporate defaults over multiple horizons. However, it has a noticeable shortcoming because default correlations through intensities are conspicuously absent when the prediction horizon is more than one data period. We propose a new forward-intensity approach that builds in correla...

This paper investigates the financial default model with stochastic intensity by incomplete data. On strength of process-designated point process, likelihood function in parameter estimation can be decomposed into factor term and event term. The successfully estimated filtered method, calculated a standardized manner. empirical study reveals that, under first outperforms other terms efficiency,...

In this paper, we develop a generalized affine model to characterize correlated credit risk of multi-firms. When valuing credit derivatives, this new approach allows to incorporate correlative market and credit risk, interdependent default risk structure and counterparty risk into consideration. We have demonstrated our affine model not only combines the existing structural models and intensity...

This project describes credit default swap (CDS) and shows how to calculate a fair value for such a contract. The stochastic evaluation of both the interest rate and the default intensity are first studied independent by using one factor a Vasicek model for a bond and a one factor model for the probability of no default. After validations the combined effect of stochastic interest rates and def...

The paper deals with the modeling of mutually dependent default times of several credit names through the intensity-based approach. We extend to the case of multiple ratings some models results due to Kusuoka (1999) and Jarrow and Yu (2001). The issue of the arbitrage valuation of related basket credit derivatives is also briefly examined. We argue that our approach permits in some cases to red...

We propose a general setting for pricing single-name knock-out credit derivatives. Examples include Credit Default Swaps (CDS), European and Bermudan CDS options. The default of the underlying reference entity is modeled within a doubly stochastic framework where the default intensity follows a CIR++ process. We estimate the model parameters through a combination of a cross sectional calibratio...

The term structure of credit default swap (CDS) spreads contains useful information about the firm’s fundamentals. Companies with a high CDS slope tend to experience increases in default risk, negative earning surprises and lower profitability in the future. Such information gets incorporated only gradually into stock prices. Firms in the lowest decile of CDS slope outperform the highest decile...

We study an equilibrium model for the pricing of a defaultable zero coupon bond issued by a firm in the framework of Back [2]. The market consists of a risk-neutral informed agent, noise traders and a market maker who sets the price using the total order. When the insider does not trade, the default time possesses a default intensity in market’s view as in reduced-form credit risk models. Howev...

Corporate defaults may be triggered by some major market news or events such as financial crises or collapses of major banks or financial institutions. With a view to develop a more realistic model for credit risk analysis, we introduce a new type of reduced-form intensity-based model that can incorporate the impacts of both observable “trigger” events and economic environment on corporate defa...