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An application to credit risk of a hybrid Monte Carlo-Optimal quantization method

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  • Giorgia Callegaro

    (PMA)

  • Abass Sagna

    (PMA)

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    Abstract

    In this paper we use a hybrid Monte Carlo-Optimal quantization method to approximate the conditional survival probabilities of a firm, given a structural model for its credit defaul, under partial information. We consider the case when the firm's value is a non-observable stochastic process $(V_t)_{t \geq 0}$ and inverstors in the market have access to a process $(S_t)_{t \geq 0}$, whose value at each time t is related to $(V_s, s \leq t)$. We are interested in the computation of the conditional survival probabilities of the firm given the "investor information". As a application, we analyse the shape of the credit spread curve for zero coupon bonds in two examples.

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    File URL: http://arxiv.org/pdf/0907.0645
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    Paper provided by arXiv.org in its series Papers with number 0907.0645.

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    Date of creation: Jul 2009
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    Handle: RePEc:arx:papers:0907.0645

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    1. Delia Coculescu & Hélyette Geman & Monique Jeanblanc, 2008. "Valuation of default-sensitive claims under imperfect information," Finance and Stochastics, Springer, vol. 12(2), pages 195-218, April.
    2. Gobet, Emmanuel, 2000. "Weak approximation of killed diffusion using Euler schemes," Stochastic Processes and their Applications, Elsevier, vol. 87(2), pages 167-197, June.
    3. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
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