Discrete credit barrier models
AbstractThe model introduced in this article is designed to provide a consistent representation for both the real-world and pricing measures for the credit process. We find that good agreement with historical and market data can be achieved across all credit ratings simultaneously. The model is characterized by an underlying stochastic process that takes on values on a discrete lattice and represents credit quality. Rating transitions are associated with barrier crossings and default events are associated with an absorbing state. The stochastic process has state-dependent volatility and jumps which are estimated by using empirical migration and default rates. A risk-neutralizing drift is estimated to consistently match the average spread curves corresponding to all the various ratings.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 5 (2005)
Issue (Month): 3 ()
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Web page: http://www.tandfonline.com/RQUF20
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- Nicola Bruti-Liberati & Christina Nikitopoulos-Sklibosios & Eckhard Platen & Erik Schlogl, 2009. "Alternative Defaultable Term Structure Models," Research Paper Series 242, Quantitative Finance Research Centre, University of Technology, Sydney.
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