An Extended Structural Credit Risk Model (forthcoming in the Icfai Journal of Financial Risk Management; all copyrights rest with the Icfai University Press)

Marco Realdon

Discussion Papers from Department of Economics, University of York

Abstract: This paper presents an extended structural credit risk model that pro- vides closed form solutions for fixed and floating coupon bonds and credit default swaps. This structural model is an "extended" one in the following sense. It allows for the default free term structure to be driven by the a multi-factor Gaussian model, rather than by a single factor one. Expected default occurs as a latent diffusion process first hits the default barrier, but the diffusion process is not the value of the firm's assets. Default can be "expected" or "unexpected". Liquidity risk is correlated with credit risk. It is not necessary to disentangle the risk of unexpected default from liquidity risk. A tractable and accurate recovery assumption is proposed.

Keywords: structural credit risk model; Vasicek model; Gaussian term structure model; bond pricing; credit default swap pricing; unexpected default; liquidity risk. (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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