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Reinforced Urn Processes For Modeling Credit Default Distributions

Author

Listed:
  • EMANUELE AMERIO

    (INSEAD & Università Bocconi, IMQ, V.le Isonzo 25, Milano 20135, Italy)

  • PIETRO MULIERE

    (Università Bocconi and Politecnico di Milano, Italy)

  • PIERCESARE SECCHI

    (Università Bocconi and Politecnico di Milano, Italy)

Abstract

Based on a Reinforced Urn Process introduced by Muliereet al.[11], we propose a stochastic model for the probability of credit default for debt issuers belonging to the same Moody's rated class. The model predicts how a default probability belonging to a given term structure evolves in time as information about credit defaults of debt issuers with the same Moody's rating becomes available. Connections between implied credit default probabilities and credit spreads will be exploited.

Suggested Citation

  • Emanuele Amerio & Pietro Muliere & Piercesare Secchi, 2004. "Reinforced Urn Processes For Modeling Credit Default Distributions," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 7(04), pages 407-423.
    • Handle: RePEc:wsi:ijtafx:v:07:y:2004:i:04:n:s0219024904002505
    DOI: 10.1142/S0219024904002505
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    Citations

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    Cited by:

    1. Pasquale Cirillo & Jürg Hüsler & Pietro Muliere, 2013. "Alarm Systems and Catastrophes from a Diverse Point of View," Methodology and Computing in Applied Probability, Springer, vol. 15(4), pages 821-839, December.
    2. Dan Cheng & Pasquale Cirillo, 2019. "An Urn-Based Nonparametric Modeling of the Dependence between PD and LGD with an Application to Mortgages," Risks, MDPI, vol. 7(3), pages 1-21, July.
    3. Souto Arias, Luis A. & Cirillo, Pasquale, 2021. "Joint and survivor annuity valuation with a bivariate reinforced urn process," Insurance: Mathematics and Economics, Elsevier, vol. 99(C), pages 174-189.
    4. Peluso, Stefano & Mira, Antonietta & Muliere, Pietro, 2015. "Reinforced urn processes for credit risk models," Journal of Econometrics, Elsevier, vol. 184(1), pages 1-12.

    More about this item

    Keywords

    Default probability; credit spreads; Polya urn schemes; Dirichlet process; Beta–Stacy process; JEL classification code C11; JEL classification code G33; 62C10; 62G99; 60G09;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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