Business cycle and credit risk modeling with jump risks

Bong-Gyu Jang, Yuna Rhee and Ji Hee Yoon

Journal of Empirical Finance, 2016, vol. 39, issue PA, 15-36

Abstract: We develop a structural model that incorporates both macroeconomic risks and firm-specific jump risks. We derive analytic formulas for default probability, equity price, and CDS spreads. Based on reasonably calibrated parameters, we find that our model could predict actual default probabilities and overcome the underestimation of credit risks, especially for firms with high credit ratings, which has been one of the major limitations of the currently available structural models. The structural model highlights that macroeconomic factors are important in modeling credit risks and that default probabilities and CDS spreads could be dependent on the current economic state.

Keywords: credit risk; business cycle; jump risk; credit model; structural model; credit default swap (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:39:y:2016:i:pa:p:15-36

DOI: 10.1016/j.jempfin.2016.08.001

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