Interacting default intensity with a hidden Markov process
Jia-Wen Gu and
Tak Kuen Siu
Quantitative Finance, 2017, vol. 17, issue 5, 781-794
In this paper we consider a reduced-form intensity-based credit risk model with a hidden Markov state process. A filtering method is proposed for extracting the underlying state given the observation processes. The method can be applied to a wide range of problems. Based on this model, we derive the joint distribution of multiple default times without imposing stringent assumptions on the form of default intensities. Closed-form formulas for the distribution of default times are obtained which are then applied to solve a number of practical problems such as hedging and pricing credit derivatives. The method and numerical algorithms presented can be applicable to various forms of default intensities.
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Working Paper: Interacting Default Intensity with Hidden Markov Process (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:17:y:2017:i:5:p:781-794
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