Single and joint default in a structural model with purely discontinuous assets
AbstractStructural models of credit risk are known to present both vanishing spreads at very short maturities and a poor spread fit over longer maturities. The former shortcoming, which is due to the diffusive behavior assumed for asset values, can be circumvented by considering discontinuous assets. In this paper we resort to a pure jump process of the Variance-Gamma type. First we calibrate the corresponding Merton type structural model to single-name data for the DJ CDX NA IG and CDX NA HY components. By so doing, we show that it circumvents also the diffusive structural models difficulties over longer horizons. In particular, it corrects for underprediction of low risk spreads and overprediction of high risk ones. Then we extend the model to joint default, resorting to a recent formulation of the VG multivariate model and without superimposing a copula choice. We fit default correlation for a sample of CDX NA names, using equity correlation. The main advantage of our joint model with respect to the existing non diffusive ones is that it allows calibration without the equicorrelation assumption, but still in a parsimonious way. As an example of the default assessments which the calibrated model can provide, we price a FtD swap.
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 Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 41.
Length: 36 pages
Date of creation: 2007
Date of revision:
credit risk; structural models; Lévy asset prices; default probability; joint default.;
Find related papers by JEL classification:
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Elisa Luciano & Wim Schoutens, 2006.
"A multivariate jump-driven financial asset model,"
Taylor & Francis Journals, vol. 6(5), pages 385-402.
- Elisa Luciano & Wim Schoutens, 2005. "A Multivariate Jump-Driven Financial Asset Model," ICER Working Papers - Applied Mathematics Series 6-2005, ICER - International Centre for Economic Research.
- Elisa Luciano & Wim Schoutens, 2006. "A Multivariate Jump-Driven Financial Asset Model," Carlo Alberto Notebooks 29, Collegio Carlo Alberto.
- Flavia Barsotti, 2012. "Optimal Capital Structure with Endogenous Default and Volatility Risk," Working Papers - Mathematical Economics 2012-02, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
- Antonio Romero-Medina & Matteo Triossi, 2011.
"Games with Capacity Manipulation: Incentives and Nash Equilibria,"
Documentos de Trabajo
280, Centro de Economía Aplicada, Universidad de Chile.
- Antonio Romero-Medina & Matteo Triossi, 2013. "Games with capacity manipulation: incentives and Nash equilibria," Social Choice and Welfare, Springer, vol. 41(3), pages 701-720, September.
- Antonio Romero-Medina & Matteo Triossi, 2007. "Games of Capacities: A (Close) Look to Nash Equilibria," Carlo Alberto Notebooks 52, Collegio Carlo Alberto.
- Antonio Romero-Medina & Matteo Triossi, 2011. "Games with capacity manipulation : incentives and Nash equilibria," Economics Working Papers we1125, Universidad Carlos III, Departamento de Economía.
- Antonio Romero Medina & Mateo Triossi, 2007. "Games of capacities : a (close) look to Nash Equilibria," Economics Working Papers we075933, Universidad Carlos III, Departamento de Economía.
- Elisa Luciano, 2007. "Copula-Based Default Dependence Modelling: Where Do We Stand?," ICER Working Papers - Applied Mathematics Series 21-2007, ICER - International Centre for Economic Research.
- Variance gamma process in Wikipedia English ne '')
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Giovanni Bert).
If references are entirely missing, you can add them using this form.