Interacting Default Intensity with Hidden Markov Process

Feng-Hui Yu, Wai-Ki Ching, Jia-Wen Gu and Tak Kuen Siu

Papers from arXiv.org

Abstract: 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 may 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 may be applicable to various forms of default intensities.

Date: 2016-03
New Economics Papers: this item is included in nep-ban and nep-rmg
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Journal Article: Interacting default intensity with a hidden Markov process (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1603.02902

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