On reduced-form intensity-based model with ‘trigger’ events

Jia-Wen Gu, Wai-Ki Ching, Tak Kuen Siu and Harry Zheng
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Jia-Wen Gu: The University of Hong Kong, Hong Kong, People’s Republic of China
Wai-Ki Ching: The University of Hong Kong, Hong Kong, People’s Republic of China
Harry Zheng: Imperial College, London, UK

Journal of the Operational Research Society, 2014, vol. 65, issue 3, 331-339

Abstract: Corporate defaults may be triggered by some major market news or events such as financial crises or collapses of major banks or financial institutions. With a view to develop a more realistic model for credit risk analysis, we introduce a new type of reduced-form intensity-based model that can incorporate the impacts of both observable ‘trigger’ events and economic environment on corporate defaults. The key idea of the model is to augment a Cox process with ‘trigger’ events. Both single-default and multiple-default cases are considered in this paper. In the former case, a simple expression for the distribution of the default time is obtained. Applications of the proposed model to price defaultable bonds and multi-name Credit Default Swaps are provided.

Date: 2014
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Working Paper: On Reduced Form Intensity-based Model with Trigger Events (2013)
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