Interacting Default Intensity with Hidden Markov Process
Computational Finance
2016-03-10 v1
Abstract
In this paper we consider a reduced-form intensity-based credit risk model with a hidden Markov state process. A filtering method is proposed for extracting the underlying state given the observation processes. The method may be applied to a wide range of problems. Based on this model, we derive the joint distribution of multiple default times without imposing stringent assumptions on the form of default intensities. Closed-form formulas for the distribution of default times are obtained which are then applied to solve a number of practical problems such as hedging and pricing credit derivatives. The method and numerical algorithms presented may be applicable to various forms of default intensities.
Cite
@article{arxiv.1603.02902,
title = {Interacting Default Intensity with Hidden Markov Process},
author = {Feng-Hui Yu and Wai-Ki Ching and Jia-Wen Gu and Tak-Kuen Siu},
journal= {arXiv preprint arXiv:1603.02902},
year = {2016}
}