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An intensity model for credit risk with switching Lévy processes

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Hainaut, Donatien [UCL] Le Courtois, Olivier

We develop a switching regime version of the intensity model for credit risk pricing. The default event is specified by a Poisson process whose intensity is modeled by a switching Lévy process. This model presents several interesting features. First, as Lévy processes encompass numerous jump processes, our model can duplicate the sudden jumps observed in credit spreads. Also, due to the presence of jumps, probabilities do not vanish at very short maturities, contrary to models based on Brownian dynamics. Furthermore, as the parameters of the Lévy process are modulated by a hidden Markov chain, our approach is well suited to model changes of volatility trends in credit spreads, related to modifications of unobservable economic factors.

Document type Article de périodique (Journal article)
Access type Accès libre
Publication date 2013
Language Anglais
Journal information "Quantitative Finance" - Vol. 14, no.8, p. 1453-1465 (2013)
Peer reviewed yes
Publisher Routledge (Abingdon)
issn 1469-7688
e-issn 1469-7696
Publication status Publié
Affiliation Rennes School of Business - Finance
Links
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Bibliographic reference Hainaut, Donatien ; Le Courtois, Olivier. An intensity model for credit risk with switching Lévy processes. In: Quantitative Finance, Vol. 14, no.8, p. 1453-1465 (2013)
Permanent URL http://hdl.handle.net/2078/185390