A CLOSED-FORM EXTENSION TO THE BLACK-COX MODEL

Aurélien Alfonsi () and Jérôme Lelong ()
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Aurélien Alfonsi: Project team MathFi ENPC-INRIA-UMLV, CERMICS, Université Paris-Est, Ecole des Ponts, 6-8 avenue Blaise Pascal, 77455 Marne La Vallée, France
Jérôme Lelong: Unité de Mathématiques Appliquées, Ecole Nationale Supérieure de Techniques Avancées ParisTech, 42 bd Victor 75015 Paris, France;

International Journal of Theoretical and Applied Finance (IJTAF), 2012, vol. 15, issue 08, 1-30

Abstract: In the Black-Cox model, a firm defaults when its value hits an exponential barrier. Here, we propose an hybrid model that generalizes this framework. The default intensity can take two different values and switches when the firm value crosses a barrier. Of course, the intensity level is higher below the barrier. We get an analytic formula for the Laplace transform of the default time. This result can be also extended to multiple barriers and intensity levels. Then, we explain how this model can be calibrated to Credit Default Swap prices and show its tractability on different kinds of data. We also present numerical methods to numerically recover the default time distribution.

Keywords: Credit risk; intensity model; structural model; Black-Cox model; hybrid model; Parisian options; ParAsian options (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024912500537

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