IDEAS home Printed from https://ideas.repec.org/p/hal/journl/hal-04272406.html
   My bibliography  Save this paper

A structural model for credit risk with switching processes and synchronous jumps

Author

Listed:
  • Donatien Hainaut

    (ESC [Rennes] - ESC Rennes School of Business)

  • David Colwell

    (The University of New South Wales)

Abstract

This paper studies a switching regime version of Merton's structural model for the pricing of default risk. The default event depends on the total value of the firm's asset modeled by a switching Lévy process. The novelty of this approach is to consider that firm's asset jumps synchronously with a change in the regime. After a discussion of dynamics under the risk neutral measure, two models are presented. In the first one, the default happens at bond maturity, when the firm's value falls below a predetermined barrier. In the second version, the firm can enter bankruptcy at multiple predetermined discrete times. The use of a Markov chain to model switches in hidden external factors makes it possible to capture the effects of changes in trends and volatilities exhibited by default probabilities. With synchronous jumps, the firm's asset and state processes are no longer uncorrelated. Finally, some econometric evidence that switching Lévy processes, with synchronous jumps, fit well historical time series is provided.

Suggested Citation

  • Donatien Hainaut & David Colwell, 2014. "A structural model for credit risk with switching processes and synchronous jumps," Post-Print hal-04272406, HAL.
    • Handle: RePEc:hal:journl:hal-04272406
    DOI: 10.1080/1351847X.2014.924079
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-04272406. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: CCSD (email available below). General contact details of provider: https://hal.archives-ouvertes.fr/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.