A generalized intensity-based framework for single-name credit risk

DOI10.1007/978-3-319-33446-2_13MaRDI QIDQ4689912zbMATH OpenOpenAlexFDO

Authors Frank Gehmlich, Thorsten Schmidt

Publication date 22 October 2018

Published in Innovations in Derivatives Markets (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1512.03896

zbMATH Keywords

credit riskforward-rateHJMreduced-form approachstochastic discontinuitiesstructural approach

Mathematics Subject Classification ID

Credit risk (91G40)

Abstract: The intensity of a default time is obtained by assuming that the default indicator process has an absolutely continuous compensator. Here we drop the assumption of absolute continuity with respect to the Lebesgue measure and only assume that the compensator is absolutely continuous with respect to a general $sigma$-finite measure. This allows for example to incorporate the Merton-model in the generalized intensity based framework. An extension of the Black-Cox model is also considered. We propose a class of generalized Merton models and study absence of arbitrage by a suitable modification of the forward rate approach of Heath-Jarrow-Morton (1992). Finally, we study affine term structure models which fit in this class. They exhibit stochastic discontinuities in contrast to the affine models previously studied in the literature.

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Cites work

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Cited in

(2)

• General dynamic term structures under default risk
• Dynamic defaultable term structure modeling beyond the intensity paradigm

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