Time-changed CIR default intensities with two-sided mean-reverting jumps (Q2448696)

The authors consider a jump-diffusion extension of the classical diffusion default intensity model. The extension is obtained by applying subordination in the sense of Bochner. The state variable in the model \(X\) follows a diffusion process and drives the default intensity. Together with the default indicator process \(D,\) it forms a bi-variate process \((X(t),D(t)).\) This bi-variate process is further subordinated by a Lévy subordinator \(T(t)\). The time-changed process \((X(T (t)),Y(T(t)))\) is characterized by the Markovian Itō semimartingale. It is shown that the time-changed default indicator has a jump-diffusion or pure jump intensity. When \(X\) is a Cox-Ingersoll-Ross diffusion with mean-reverting drift, the default intensity of the subordinated model is a jump-diffusion or a pure jump process with mean-reverting in both directions that stays nonnegative.\newline Applications of the model to the pricing of credit-sensitive securities are presented.