On Reduced Form Intensity-based Model with Trigger Events
Abstract
Corporate defaults may be triggered by some major market news or events such as financial crises or collapses of major banks or financial institutions. With a view to develop a more realistic model for credit risk analysis, we introduce a new type of reduced-form intensity-based model that can incorporate the impacts of both observable "trigger" events and economic environment on corporate defaults. The key idea of the model is to augment a Cox process with trigger events. Both single-default and multiple-default cases are considered in this paper. In the former case, a simple expression for the distribution of the default time is obtained. Applications of the proposed model to price defaultable bonds and multi-name Credit Default Swaps (CDSs) are provided.
Cite
@article{arxiv.1301.0109,
title = {On Reduced Form Intensity-based Model with Trigger Events},
author = {Jia-Wen Gu and Wai-Ki Ching and Tak-Kuen Siu and Harry Zheng},
journal= {arXiv preprint arXiv:1301.0109},
year = {2013}
}