Statistical Inference for Time-changed Brownian Motion Credit Risk Models
AbstractWe consider structural credit modeling in the important special case where the log-leverage ratio of the firm is a time-changed Brownian motion (TCBM) with the time-change taken to be an independent increasing process. Following the approach of Black and Cox, one defines the time of default to be the first passage time for the log-leverage ratio to cross the level zero. Rather than adopt the classical notion of first passage, with its associated numerical challenges, we accept an alternative notion applicable for TCBMs called "first passage of the second kind". We demonstrate how statistical inference can be efficiently implemented in this new class of models. This allows us to compare the performance of two versions of TCBMs, the variance gamma (VG) model and the exponential jump model (EXP), to the Black-Cox model. When applied to a 4.5 year long data set of weekly credit default swap (CDS) quotes for Ford Motor Co, the conclusion is that the two TCBM models, with essentially one extra parameter, can significantly outperform the classic Black-Cox model.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1102.2412.
Date of creation: Feb 2011
Date of revision:
Contact details of provider:
Web page: http://arxiv.org/
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-19 (All new papers)
- NEP-BAN-2011-02-19 (Banking)
- NEP-CIS-2011-02-19 (Confederation of Independent States)
- NEP-ECM-2011-02-19 (Econometrics)
- NEP-RMG-2011-02-19 (Risk Management)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators).
If references are entirely missing, you can add them using this form.