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A Simple Model for Credit Migration and Spread Curves

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  • Li Chen

    (Princeton University)

  • Damir Filipovic

    (Princeton University)

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Abstract

We propose and examine a simple model for credit migration and spread curves of a single firm both under the real-world and the risk-neutral measure. This model is a hybrid of a structural and a reduced-form model. Default is triggered either by successive downgradings of the firm or an unpredictable jump of the state process. The default time is accordingly decomposed into predictable and totally inaccessible part.

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File URL: http://128.118.178.162/eps/fin/papers/0305/0305003.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0305003.

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Length: 21 pages
Date of creation: 14 May 2003
Date of revision:
Handle: RePEc:wpa:wuwpfi:0305003

Note: Type of Document - pdf; prepared on IBM PC - PC-TEX/UNIX Sparc TeX; to print on HP/PostScript/Franciscan monk; pages: 21 ; figures: included. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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Web page: http://128.118.178.162

Related research

Keywords: Credit Risk Modeling; Credit Migration; Structural Models; Intensity Based Models; Affine Processes;

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References

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  1. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
  2. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-64, May.
  3. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
  4. Jin-Chuan Duan & Jean-Guy Simonato, 1995. "Estimating and Testing Exponential Affine Term Structure Models by Kalman Filter," CIRANO Working Papers 95s-44, CIRANO.
  5. Li Chen & Damir Filipovic, 2003. "Pricing Credit Default Swaps Under Default Correlations and Counterparty Risk," Finance 0303009, EconWPA.
  6. Gregory R. Duffee, 1996. "Estimating the price of default risk," Finance and Economics Discussion Series 96-29, Board of Governors of the Federal Reserve System (U.S.).
  7. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
  8. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
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Citations

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Cited by:
  1. Li Chen & H. Vincent Poor, 2003. "Information Asymmetry, Corporate Debt Financing and Optimal Investment Decisions: A Reduced Form Approach," Finance 0312008, EconWPA.
  2. Li Chen & Damir Filipovic, 2003. "Credit Derivatives in an Affine Framework," Finance 0307002, EconWPA.
  3. Li Chen & H. Vincent Poor, 2003. "Credit Risk Modeling and the Term Structure of Credit Spreads," Finance 0312009, EconWPA.
  4. Peter Carr & Vadim Linetsky, 2006. "A jump to default extended CEV model: an application of Bessel processes," Finance and Stochastics, Springer, vol. 10(3), pages 303-330, September.

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