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On a reduced form credit risk model with common shock and regime switching

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  • Liang, Xue
  • Wang, Guojing

Abstract

Reduced form credit risk models are important ones in credit risk theory. In such a model, certain correlated relations are constructed to represent the default dependence structure among the default intensity processes. In this paper, we introduced a reduced form credit risk model in which the default dependence structures among default intensity processes are described by the so-called common shocks with regime-switching. We derive some closed-form expressions for the joint distribution of the default times and for the pricing formulas of the basket default swaps. We also give numerical results to show the applicable aspects of the proposed model.

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  • Liang, Xue & Wang, Guojing, 2012. "On a reduced form credit risk model with common shock and regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 51(3), pages 567-575.
    • Handle: RePEc:eee:insuma:v:51:y:2012:i:3:p:567-575
    DOI: 10.1016/j.insmatheco.2012.07.010
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    References listed on IDEAS

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    2. Eckert, Johanna & Gatzert, Nadine & Martin, Michael, 2016. "Valuation and risk assessment of participating life insurance in the presence of credit risk," Insurance: Mathematics and Economics, Elsevier, vol. 71(C), pages 382-393.
    3. Ballestra, Luca Vincenzo & Pacelli, Graziella, 2014. "Valuing risky debt: A new model combining structural information with the reduced-form approach," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 261-271.
    4. Hainaut, Donatien, 2020. "Credit risk modelling with fractional self-excited processes," LIDAM Discussion Papers ISBA 2020002, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    5. Yuan, Yu & Han, Xia & Liang, Zhibin & Yuen, Kam Chuen, 2023. "Optimal reinsurance-investment strategy with thinning dependence and delay factors under mean-variance framework," European Journal of Operational Research, Elsevier, vol. 311(2), pages 581-595.
    6. Egami, M. & Kevkhishvili, R., 2017. "An analysis of simultaneous company defaults using a shot noise process," Journal of Banking & Finance, Elsevier, vol. 80(C), pages 135-161.
    7. Masahiko Egami & Rusudan Kevkhishvili, 2016. "An Analysis of Simultaneous Company Defaults Using a Shot Noise Process," Discussion papers e-16-001, Graduate School of Economics , Kyoto University.
    8. Wang, Guanqing & Wang, Guojing & Yang, Hailiang, 2016. "On a multi-dimensional risk model with regime switching," Insurance: Mathematics and Economics, Elsevier, vol. 68(C), pages 73-83.
    9. Bi, Junna & Liang, Zhibin & Xu, Fangjun, 2016. "Optimal mean–variance investment and reinsurance problems for the risk model with common shock dependence," Insurance: Mathematics and Economics, Elsevier, vol. 70(C), pages 245-258.
    10. Hainaut, Donatien, 2019. "Credit risk modelling with fractional self-excited processes," LIDAM Discussion Papers ISBA 2019027, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    11. Liang, Xue & Wang, Guojing & Dong, Yinghui, 2013. "A Markov regime switching jump-diffusion model for the pricing of portfolio credit derivatives," Statistics & Probability Letters, Elsevier, vol. 83(1), pages 373-381.

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