Credit risk and contagion via self-exciting default intensity

Robert Elliott () and Jia Shen ()

Annals of Finance, 2015, vol. 11, issue 3, 319-344

Abstract: Recent empirical evidences indicate that default rates are influenced not only by the observable or latent risk factors, but also depend on the history of past defaults. Motivated by this empirical finding, we consider in this paper a reduced-form, intensity-based credit risk model, which allows for both frailty and default contagion, using a so-called “self-exciting” intensity, in the sense that the default intensity varies not only with the risk factors, but also depends on the previous default history of all the firms. With “self-exciting” default intensity, we are able to obtain closed-form expressions for the pricing of credit derivative securities in our model. The estimation of parameters using the EM algorithm is considered as well. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Credit derivative; Default contagion; Frailty; Self-exciting process; Markov chain; G12; G13; C58 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:annfin:v:11:y:2015:i:3:p:319-344

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DOI: 10.1007/s10436-015-0259-z

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