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Pricing method and applications for the farmer's joint liability based on intensity model and Monte Carlo simulation

Author

Listed:
  • Sulin Pang

    (Department of Mathematics/School of Emergency, Management/Institute of Finance Engineering, Jinan University, Guangzhou 510632, China;
    Guangdong Emergency Technology Research Center of Risk Evaluation and Prewarning on Public Network Security, Guangzhou 510632, China)

  • Jinwang Xiao

    (Department of Mathematics/School of Emergency, Management/Institute of Finance Engineering, Jinan University, Guangzhou 510632, China;
    Guangdong Emergency Technology Research Center of Risk Evaluation and Prewarning on Public Network Security, Guangzhou 510632, China)

  • Shuqing Li

    (Department of Mathematics/School of Emergency, Management/Institute of Finance Engineering, Jinan University, Guangzhou 510632, China;
    Guangdong Emergency Technology Research Center of Risk Evaluation and Prewarning on Public Network Security, Guangzhou 510632, China)

Abstract

This paper studies the pricing problem of group lending using the strength model and the Monte Carlo simulation method. Simulating the default process of farmers with a Poisson process, this paper describes the default distribution for farmers, and based on which the paper establishes the pricing model of the group lending and obtains the critical number of the defaulted farmers and the default probability for the group. Next, this paper introduces the t-Copula function to describe the default correlation between farmers, and obtains the partially analytical solution of the loan rate for the group lending, and it also provides the Monte Carlo simulation algorithm for the pricing of group lending based on t-Copula function. Finally, this paper carries out the Monte Carlo simulation algorithm on the pricing problem of group lending with three and five peasant households through an example, and discusses the relationship between the loan rate and each of the influencing factors in the pricing model of the group lending.

Suggested Citation

  • Sulin Pang & Jinwang Xiao & Shuqing Li, 2015. "Pricing method and applications for the farmer's joint liability based on intensity model and Monte Carlo simulation," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 2(01), pages 1-21.
    • Handle: RePEc:wsi:jfexxx:v:02:y:2015:i:01:n:s2345768615500087
    DOI: 10.1142/S2345768615500087
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    References listed on IDEAS

    as
    1. Dilip Madan & Haluk Unal, 1996. "Pricing the Risks of Default," Center for Financial Institutions Working Papers 94-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Patton, Andrew J, 2001. "Estimation of Copula Models for Time Series of Possibly Different Length," University of California at San Diego, Economics Working Paper Series qt3fc1c8hw, Department of Economics, UC San Diego.
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