Dynamic term structure modelling with default and mortality risk: new results on existence and monotonicity

DOI10.4064/BC105-0-13MaRDI QIDQ5265543zbMATH OpenOpenAlexFDO

Authors Thorsten Schmidt, Stefan Tappe

Publication date 28 July 2015

Published in Banach Center Publications (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1306.6267

zbMATH Keywords

Brownian motionsportfolio credit risklife insuranceinteger-valued random measuredynamic term structure models

Mathematics Subject Classification ID

Brownian motion (60J65) Credit risk (91G40) Random measures (60G57) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80)

Abstract: This paper considers general term structure models like the ones appearing in portfolio credit risk modelling or life insurance. We give a general model starting from families of forward rates driven by infinitely many Brownian motions and an integer-valued random measure, generalizing existing approaches in the literature. Then we derive drift conditions which are equivalent to no asymptotic free lunch on the considered market. Existence results are also given. In practice, models possessing a certain monotonicity are favorable and we study general conditions which guarantee this. The setup is illustrated with some examples.

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