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A Non-Homogeneous Semi-Markov Reward Model For The Credit Spread Computation

Author

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  • GUGLIELMO D'AMICO

    (Drug Sciences Department, University "G. D'Annunzio", via dei Vestini 31, Chieti, 66013, Italy)

  • JACQUES JANSSEN

    (CESIAF, Bld Paul Janson, 84 bte 9, Charleroi, 6000, Belgium)

  • RAIMONDO MANCA

    (Department of Mathematics for the Decisions in Economics, Finance and Insurance, via del Castro Laurenziano, 9, Roma, 00161, Italy)

Abstract

In this paper, we present a model to describe the evolution of the yield spread by considering the rating evaluation as the determinant of credit spreads. The underlying rating migration process is assumed to be a non-homogeneous discrete time semi-Markov process. We calculate the total sum of mean basis points paid within any given time interval. From this information we show how it is possible to extract the time evolution of expected interest rates and discount factors.

Suggested Citation

  • Guglielmo D'Amico & Jacques Janssen & Raimondo Manca, 2011. "A Non-Homogeneous Semi-Markov Reward Model For The Credit Spread Computation," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 14(02), pages 221-238.
    • Handle: RePEc:wsi:ijtafx:v:14:y:2011:i:02:n:s0219024911006346
    DOI: 10.1142/S0219024911006346
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    Citations

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    Cited by:

    1. Guglielmo D'Amico & Raimondo Manca & Giovanni Salvi, 2011. "Bivariate Semi-Markov Process for Counterparty Credit Risk," Papers 1112.0226, arXiv.org, revised Oct 2012.
    2. Guglielmo D'Amico & Filippo Petroni & Philippe Regnault & Stefania Scocchera & Loriano Storchi, 2019. "A copula based Markov Reward approach to the credit spread in European Union," Papers 1902.00691, arXiv.org.
    3. D’Amico, Guglielmo & Petroni, Filippo, 2023. "ROCOF of higher order for semi-Markov processes," Applied Mathematics and Computation, Elsevier, vol. 441(C).
    4. Guglielmo D’Amico & Philippe Regnault & Stefania Scocchera & Loriano Storchi, 2018. "A Continuous-Time Inequality Measure Applied to Financial Risk: The Case of the European Union," IJFS, MDPI, vol. 6(3), pages 1-16, June.
    5. K. Khorshidian & F. Negahdari & H. A. Mardnifard, 2016. "Estimation for Discrete-time Semi-Markov Reward Processes: Analysis and Inference," Methodology and Computing in Applied Probability, Springer, vol. 18(3), pages 885-900, September.
    6. D’Amico, Guglielmo & Scocchera, Stefania & Storchi, Loriano, 2018. "Financial risk distribution in European Union," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 252-267.

    More about this item

    Keywords

    Credit rating; reward; algorithm;
    All these keywords.

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