Infectious Default Model with Recovery and Continuous Limit
نویسندگان
چکیده
We introduce an infectious default and recoverymodel forN obligors. Obligors are assumed to be exchangeable and their states are described by N Bernoulli random variables Si(i = 1, · · · , N). They are expressed by multiplying independent Bernoulli variables Xi, Yij , Y ′ ij , and default and recovery infections are described by Yij and Y ′ ij . We obtain the default probability function P (k) for k defaults. Taking its continuous limit, we find two nontrivial probability distributions with the reflection symmetry of Si ↔ 1 − Si. Their profiles are singular and oscillating and we understand it theoretically. We also compare P (k) with an implied default distribution function inferred from the quotes of iTraxx-CJ. In order to explain the behavior of the implied distribution, the recovery effect may be necessary.
منابع مشابه
Infectious Default Model with Recovery and Continuous Limits
We introduce an infectious default and recovery model for N obligors. The obligors are assumed to be exchangeable and their states are described by N Bernoulli-type random variables Si(i = 1, · · · , N). They are expressed by multiplying independent Bernoulli variables Xi, Yij and Y ′ ij , and the default and recovery infections are described by Yij and Y ′ ij . We obtain the default probabilit...
متن کاملDependence of Default Probability and Recovery Rate in Structural Credit Risk Models: Empirical Evidence from Greece
The main idea of this paper is to study the dependence between the probability of default and the recovery rate on credit portfolio and to seek empirically this relationship. We examine the dependence between PD and RR by theoretical approach. For the empirically methodology, we use the bootstrapped quantile regression and the simultaneous quantile regression. These methods allow to determinate...
متن کاملInvestigating the missing data effect on credit scoring rule based models: The case of an Iranian bank
Credit risk management is a process in which banks estimate probability of default (PD) for each loan applicant. Data sets of previous loan applicants are built by gathering their data, and these internal data sets are usually completed using external credit bureau’s data and finally used for estimating PD in banks. There is also a continuous interest for bank to use rule based classifiers to b...
متن کاملPricing Distressed CDOs with Stochastic Recovery
In this article, a framework for the joint modelling of default and recovery risk in a portfolio of credit risky assets is presented. The model especially accounts for the correlation of defaults on the one hand and correlation of default rates and recovery rates on the other hand. Nested Archimedean copulas are used to model different dependence structures. For the recovery rates a very flexib...
متن کاملPricing corporate bonds in an arbitrary jump-diffusion model based on an improved Brownian-bridge algorithm
In this paper, we provide an efficient algorithm for the computation of default probabilities and bond prices in a structural default model with jumps. Our algorithm allows jump-diffusion processes with arbitrary jump-size distribution as a model for the logarithm of the value process of a firm. Moreover, the algorithm is unbiased and is capable of capturing stochastic recovery rates, which are...
متن کامل