Bao, Qunfang and Li, Shenghong and Liu, Guimei (2010): Survival Measures and Interacting Intensity Model: with Applications in Guaranteed Debt Pricing.
Download (426kB) | Preview
This paper studies survival measures in credit risk models. Survival measure, which was first introduced by Schonbucher  in the framework of defaultable LMM, has the advantage of eliminating default indicator variable directly from the expectation by absorbing it into Randon-Nikodym density process. Survival measure approach was further extended by Collin-Duresne to avoid calculating a troublesome jump in IBPR reduced-form model. This paper considers survival measure in "HBPR" model, i.e. default time is characterized by Cox construction, and studies the relevant drift changes and martingale representations. This paper also takes advantage of survival measure to solve the looping default problem in interacting intensity model with stochastic intensities. Guaranteed debt is priced under this model, as an application of survival measure and interacting intensity model. Detailed numerical analysis is performed in this paper to study influence of stochastic pre-default intensities and contagion on value of a two firms' bilateral guaranteed debt portfolio.
|Item Type:||MPRA Paper|
|Original Title:||Survival Measures and Interacting Intensity Model: with Applications in Guaranteed Debt Pricing|
|English Title:||Survival measures and interacting intensity model: with applications in guaranteed debt pricing|
|Keywords:||Survival Measure, Interacting Intensity Model, Measure Change, Guaranteed Debt, Mitigation and Contagion.|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing ; Futures Pricing
|Depositing User:||Dr. Qunfang Bao|
|Date Deposited:||29. Dec 2010 00:29|
|Last Modified:||30. Dec 2015 20:16|
Bao, Q. F., Liu, G. M., \& Li, S. H.(2010). CDO pricing in VG copula model with stochastic correlations. Zhejiang University, Working Paper.
Bao, Q. F., Liu, G. M., \& Li, S. H.(2010). CDO Pricing with Random Factor Loadings in VG Copula Model. Zhejiang University, Working Paper.
Bielecki, T., Rutkowski, M.(2002). Credit risk: modeling, valuation and hedging. Springer-Verlag, Berlin Heidelberg New York.
Collin-Dufresene, P., Goldstein, R. S., \& Hugonnier, J.(2004). A general formula for valuing defaultable securities. Econometrica, 77, 1277–1307.
Duffie, D., Schroder, M., \& Skiadas, C.(1996). Recursive valuation of defaultable securities and the timing of resolution of uncertainty. Annals of Applied Probability, 6, 1075-1090.
Jarrow, R., Yu, F.(2001). Counterparty risk and the pricing of defaultable securities. Journal of Finance, 56, 1765-1800.
Jeanblanc, M., Yann, Le Cam.(2007). Reduced form modelling for credit risk. Available at SSRN: http://ssrn.com/abstract=1021545.
Leung, S. Y., Kwok, Y. K.(2005). Credit default swap valuation with counterparty risk, Kyoto Economics Review, 74, 25-45.
Lando, D.(1998). On cox processes and credit risky securities. Review of Derivatives Research, 2, 99-120.
Leung, K. S., Kwok, Y. K.(2009). Counterparty risk for credit default swaps: Markov chain interacting intensities model with stochastic intensity. Asia-Pacific Finan Markets, 16, 169–181.
Li, S. G., Bao, Q. F., Li, S. H., \& Liu, G. M.(2010). Pricing Mitigation and Contagion Effect of Guaranteed Debt in Interacting Intensity Model. International Conference on Business Intelligence and Financial Engineering, accepted.
Schonbucher P.(1998). A LIBOR Market Model with Default Risk. Bonn University, Working paper.
Walker, M. B.(2006). Credit default swaps with counterparty risk: A calibrated Markov model. Journal of Credit Risk, 2(1), 31–49.
Yu, F.(2005). Default correlation in reduced-form models. Journal of Investment Management, 3(4), 33–42.
Yu, F.(2007). Correlated defaults in intensity-based models. Mathmatical Finance, 17, 155–173.