An analysis of simultaneous company defaults using a shot noise process
M. Egami and
Journal of Banking & Finance, 2017, vol. 80, issue C, 135-161
During the subprime mortgage crisis, it became apparent that practical models, such as the one-factor Gaussian copula, had underestimated company default correlations. Complex models that attempt to incorporate default dependency are difficult to implement in practice. In this study, we develop a model for a company asset process, based on which we calculate simultaneous default probabilities using an option-theoretic approach. In our model, a shot noise process serves as the key element for controlling correlations among companies’ assets. The risk factor driving the shot noise process is common to all companies in an industry but the shot noise parameters are assumed company-specific; therefore, every company responds differently to this common risk factor. Our model gives earlier warning of financial distress and predicts higher simultaneous default probabilities than commonly used geometric Brownian motion asset model. It is also computationally simple and can be extended to analyze any finite number of companies.
Keywords: Credit risk; Shot noise; Option-theoretic approach; Asset process; Simultaneous default probabilities; Risk management (search for similar items in EconPapers)
JEL-codes: G01 G17 G21 G32 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:80:y:2017:i:c:p:135-161
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().