Post global financial crisis modelling: credit risk for firms that are too big to fail

Ephraim Clark, Sovan Mitra and Octave Jokung-Nguena
Additional contact information
Octave Jokung-Nguena: IDP - Institut du Développement et de la Prospective - EA 1384 - UVHC - Université de Valenciennes et du Hainaut-Cambrésis - IAE - Institut d'Administration des Entreprises - UPHF - Université Polytechnique Hauts-de-France

Post-Print from HAL

Abstract: The global financial crisis has brought in question the validity of credit risk models. The firms that are 'too big to fail' are frequently discussed in the media, and continue to borrow rather than defaulting. In this paper we propose a new credit risk model for firms that are too big to fail. We propose a structural model of credit risk but model credit risk as a real option. We derive a closed form solution for the option to default and take into account the borrowing practices of systemically important firms. We develop our model to take into account economic factors using regime switching, and derive an option pricing solution under such a process. Finally, we obtain solutions for hedging the option to default, for markets where incompleteness exists for such options. We conduct numerical experiments to calculate the option to default at different debt values and volatility.

Keywords: credit risk; real options; too big to fail; hedging; financial crisis (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Published in International Journal of Financial Markets and Derivatives, 2019, 7 (1), pp.15-39. ⟨10.1504/IJFMD.2019.101235⟩

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Post global financial crisis modelling: credit risk for firms that are too big to fail (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03699161

DOI: 10.1504/IJFMD.2019.101235

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().