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On reduced-form intensity-based model with ‘trigger’ events

Author

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  • Jia-Wen Gu

    (The University of Hong Kong, Hong Kong, People’s Republic of China)

  • Wai-Ki Ching

    (The University of Hong Kong, Hong Kong, People’s Republic of China)

  • Tak-Kuen Siu

    (1] City University London, London, UK[2] Macquarie University, Sydney, Australia)

  • Harry Zheng

    (Imperial College, London, UK)

Abstract

Corporate defaults may be triggered by some major market news or events such as financial crises or collapses of major banks or financial institutions. With a view to develop a more realistic model for credit risk analysis, we introduce a new type of reduced-form intensity-based model that can incorporate the impacts of both observable ‘trigger’ events and economic environment on corporate defaults. The key idea of the model is to augment a Cox process with ‘trigger’ events. Both single-default and multiple-default cases are considered in this paper. In the former case, a simple expression for the distribution of the default time is obtained. Applications of the proposed model to price defaultable bonds and multi-name Credit Default Swaps are provided.

Suggested Citation

  • Jia-Wen Gu & Wai-Ki Ching & Tak-Kuen Siu & Harry Zheng, 2014. "On reduced-form intensity-based model with ‘trigger’ events," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 65(3), pages 331-339, March.
    • Handle: RePEc:pal:jorsoc:v:65:y:2014:i:3:p:331-339
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    Cited by:

    1. Gechun Liang & Xingchun Wang, 2021. "Pricing vulnerable options in a hybrid credit risk model driven by Heston–Nandi GARCH processes," Review of Derivatives Research, Springer, vol. 24(1), pages 1-30, April.
    2. Jonathan Crook & David Edelman, 2014. "Special issue credit risk modelling," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 65(3), pages 321-322, March.

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