CREDIT MODELING UNDER JUMP DIFFUSIONS WITH EXPONENTIALLY DISTRIBUTED JUMPS — STABLE CALIBRATION, DYNAMICS AND GAP RISK

Martin Hellmich (), Stefan Kassberger and Wolfgang M. Schmidt ()
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Martin Hellmich: Frankfurt School of Finance and Management, Sonnemannstr. 9-11, 60314 Frankfurt, Germany
Wolfgang M. Schmidt: Frankfurt School of Finance and Management, Sonnemannstr. 9-11, 60314 Frankfurt, Germany

International Journal of Theoretical and Applied Finance (IJTAF), 2013, vol. 16, issue 04, 1-26

Abstract: This paper investigates a structural credit default model that is based on a hyper-exponential jump diffusion process for the value of the firm. For credit default swap prices and other quantities of interest, explicit expressions for the corresponding Laplace transforms are derived. The time-dynamics of the model are studied, particularly the jumps in credit spreads, the understanding of which is crucial e.g. for the pricing of gap risk. As an application of our findings, the model is calibrated to credit default swap spreads observed in the market.

Keywords: Credit default; structural model; credit default swap; hyper-exponential jump diffusion; spectrally negative Kou process; entropy-based calibration (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219024913500210

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