Credit Contagion in a Long Range Dependent Macroeconomic Factor Model

Francesca Biagini (), Serena Fuschini () and Claudia Klüppelberg ()
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Francesca Biagini: Ludwig-Maximilians Universität, Department of Mathematics
Serena Fuschini: University of Bologna, Department of Mathematics
Claudia Klüppelberg: Technische Universität München, Center for Mathematical Sciences, and Institute for Advanced Study

Chapter Chapter 4 in Advanced Mathematical Methods for Finance, 2011, pp 105-132 from Springer

Abstract: Abstract We propose a new default contagion model, where default may originate from the performance of a specific firm itself but can also be directly influenced by defaults of other firms. The default intensities of our model depend on smoothly varying macroeconomic variables, driven by a long-range dependent process. In particular, we focus on the pricing of defaultable derivatives whose defaults depend on the macroeconomic process and may be affected by the contagion effect. In our approach we are able to provide explicit formulas for prices of defaultable derivatives at any time t∈[0,T]. Finally we calculate some examples explicitly, where the macroeconomic factor process is given by a functional of the fractional Brownian motion with Hurst index $H >\frac{1}{2}$ .

Keywords: Credit risk; Contagion modeling; Credit intensity; Latent process; Macroeconomic variables process; Long-range dependence; Fractional Brownian motion; Pricing defaultable derivatives; 60G15; 91B70; 91Gxx; 60G22 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-642-18412-3_4

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DOI: 10.1007/978-3-642-18412-3_4

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