Bivariate Semi-Markov Process for Counterparty Credit Risk

Guglielmo D'Amico, Raimondo Manca and Giovanni Salvi

Papers from arXiv.org

Abstract: We consider the problem of constructing an appropriate multivariate model for the study of the counterparty credit risk in credit rating migration problem. For this financial problem different multivariate Markov chain models were proposed. However the markovian assumption may be inappropriate for the study of the dynamic of credit ratings which typically show non markovian like behaviour. In this paper we develop a semi-Markov approach to the study of the counterparty credit risk by defining a new multivariate semi-Markov chain model. Methods are given for computing the transition probabilities, reliability functions and the price of a risky Credit Default Swap.

Date: 2011-12, Revised 2012-10
New Economics Papers: this item is included in nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1112.0226

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