Modeling of contagious downgrades and its application to multi-downgrade protection
نویسنده
چکیده
In this paper, we use a multivariate affine jump process to model the downgrade intensities for several categories of business sector in credit portfolios. Since multivariate affine jump structure enables us to consider self-exciting effects as well as mutually exciting effects, the model can explain the downgrade clusters observed in the Japanese market. Also, we propose a new credit derivative named multi-downgrade protection (MDP) as an application of our model and discuss its fair pricing.
منابع مشابه
Modeling of Contagious Rating Changes and Its Application to Multi-Downgrade Protection∗
This paper presents a new modeling of the intensities of typical rating change events with a multivariate affine jump process. The main feature of our model is that the intensity model has a mutually exciting structure in the sense that an event occurrence can jump not only the intensity of the same type of events but those of another event types. Also, such a modeling with the multivariate aff...
متن کاملFeedback Effects of Credit Ratings
Rating agencies are often criticized for being biased in favor of borrowers, for being too slow to downgrade following credit quality deterioration, and for being oligopolists. Based on a model that takes into account the feedback effects of credit ratings, I show that: (i) rating agencies should focus not only on the accuracy of their ratings but also on the effects of their ratings on the pro...
متن کاملRevisiting Post-Downgrade Stock Underperformance: The Impact of Credit Watch Placements on Downgraded Firms’ Long-Term Recovery
Prior research documents significant negative long-term stock returns following bond-rating downgrades. Some downgraded firms are placed on credit watches before downgrades, and we find that the post-downgrade stock underperformance of such firms is significantly reduced. We explore two explanations for the difference in post-downgrade stock performance that are not mutually exclusive: (a) a cr...
متن کاملSouth African Economic Woes: Poor Political Leadership and Rating Downgrades Hampers Growth and Development
Purpose: The paper aims to focus on South Africa’s poor economic performance and the regular downgrades of the country’s economic and financial rating by international rating agencies. It attempts to show that these continuous downgrades are a recipe for economic and financial disaster in the long – run; that the continuance of this phenomenon will stymie the implementation of the National Dev...
متن کاملModeling Credit Value Adjustment With Downgrade-Triggered Termination Clause Using A Ruin Theoretic Approach
Downgrade-triggered termination clause is a recent innovation in credit risk management to control counterparty credit risk. It allows one party of an over-the-counter derivative to close off its position at marked-to-market price when the other party’s credit rating downgrades to an agreed alarming level. Although the default risk is significantly reduced, the non-defaulting party may still su...
متن کامل