A NON-HOMOGENEOUS SEMI-MARKOV REWARD MODEL FOR THE CREDIT SPREAD COMPUTATION

Guglielmo D'Amico (), Jacques Janssen () and Raimondo Manca ()
Additional contact information
Guglielmo D'Amico: Drug Sciences Department, University "G. D'Annunzio", via dei Vestini 31, Chieti, 66013, Italy
Jacques Janssen: CESIAF, Bld Paul Janson, 84 bte 9, Charleroi, 6000, Belgium
Raimondo Manca: Department of Mathematics for the Decisions in Economics, Finance and Insurance, via del Castro Laurenziano, 9, Roma, 00161, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2011, vol. 14, issue 02, 221-238

Abstract: In this paper, we present a model to describe the evolution of the yield spread by considering the rating evaluation as the determinant of credit spreads. The underlying rating migration process is assumed to be a non-homogeneous discrete time semi-Markov process. We calculate the total sum of mean basis points paid within any given time interval. From this information we show how it is possible to extract the time evolution of expected interest rates and discount factors.

Keywords: Credit rating; reward; algorithm (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:wsi:ijtafx:v:14:y:2011:i:02:n:s0219024911006346

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DOI: 10.1142/S0219024911006346

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