Linear Credit Risk Models

Damien Ackerer and Damir Filipović
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Damien Ackerer: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
Damir Filipović: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute

No 16-34, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. These models outperform the standard affine default intensity models in terms of analytical tractability. The prices of defaultable bonds and credit default swaps (CDS) are linear in the factors. The price of a CDS option can be uniformly approximated by polynomials in the factors. An empirical study illustrates the versatility of these models by fitting CDS spread time series.

Keywords: Credit Default Swap; Credit Default Swap Option; Credit Risk; Credit Valuation Adjustment; Survival Process (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2016-05, Revised 2016-06
New Economics Papers: this item is included in nep-cse, nep-ore and nep-rmg
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1634

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