Linear credit risk models

Damien Ackerer () and Damir Filipović ()
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Damien Ackerer: Swissquote Bank
Damir Filipović: EPFL and Swiss Finance Institute

Finance and Stochastics, 2020, vol. 24, issue 1, No 5, 169-214

Abstract: Abstract We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear–rational in the factors. The price of a CDS option can be uniformly approximated by polynomials in the factors. Multi-name models can produce simultaneous defaults, generate positively as well as negatively correlated default intensities, and accommodate stochastic interest rates. A calibration study illustrates the versatility of these models by fitting CDS spread time series. A numerical analysis validates the efficiency of the option price approximation method.

Keywords: Credit default swap; Credit derivatives; Credit risk; Polynomial model; Survival process; 91B25; 91B70; 91G20; 91G40; 91G60 (search for similar items in EconPapers)
JEL-codes: C51 G12 G13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s00780-019-00409-z

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