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On cox processes and credit risky securities

On cox processes and credit risky securities A framework is presented for modeling defaultable securities and credit derivatives which allows for dependence between market risk factors and credit risk. The framework reduces the technical issues of modeling credit risk to the same issues faced when modeling the ordinary term structure of interest rates. It is shown how to generalize a model of Jarrow, Lando and Turnbull (1997) to allow for stochastic transition intensities between rating categories and into default. This generalization can handle contracts with payments explicitly linked to ratings. It is also shown how to obtain a term structure model for all different rating categories simultaneously and how to obtain an affine-like structure. An implementation is given in a simple one factor model in which the affine structure gives closed form solutions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Derivatives Research Springer Journals

On cox processes and credit risky securities

Review of Derivatives Research , Volume 2 (3) – Apr 5, 2005

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References (22)

Publisher
Springer Journals
Copyright
Copyright © 1998 by Kluwer Academic Publishers
Subject
Finance; Investments and Securities
ISSN
1380-6645
eISSN
1573-7144
DOI
10.1007/BF01531332
Publisher site
See Article on Publisher Site

Abstract

A framework is presented for modeling defaultable securities and credit derivatives which allows for dependence between market risk factors and credit risk. The framework reduces the technical issues of modeling credit risk to the same issues faced when modeling the ordinary term structure of interest rates. It is shown how to generalize a model of Jarrow, Lando and Turnbull (1997) to allow for stochastic transition intensities between rating categories and into default. This generalization can handle contracts with payments explicitly linked to ratings. It is also shown how to obtain a term structure model for all different rating categories simultaneously and how to obtain an affine-like structure. An implementation is given in a simple one factor model in which the affine structure gives closed form solutions.

Journal

Review of Derivatives ResearchSpringer Journals

Published: Apr 5, 2005

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