On Reduced Form Intensity-based Model with Trigger Events

Jia-Wen Gu, Wai-Ki Ching, Tak Kuen Siu and Harry Zheng

Papers from arXiv.org

Abstract: Corporate defaults may be triggered by some major market news or events such as financial crises or collapses of major banks or financial institutions. With a view to develop a more realistic model for credit risk analysis, we introduce a new type of reduced-form intensity-based model that can incorporate the impacts of both observable "trigger" events and economic environment on corporate defaults. The key idea of the model is to augment a Cox process with trigger events. Both single-default and multiple-default cases are considered in this paper. In the former case, a simple expression for the distribution of the default time is obtained. Applications of the proposed model to price defaultable bonds and multi-name Credit Default Swaps (CDSs) are provided.

Date: 2013-01
New Economics Papers: this item is included in nep-rmg
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Journal Article: On reduced-form intensity-based model with ‘trigger’ events (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1301.0109

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