Arbeitspapier
Credit dynamics in a first passage time model with jumps
The payoff of many credit derivatives depends on the level of credit spreads. In particular, the payoff of credit derivatives with a leverage component is sensitive to jumps in the underlying credit spreads. In the framework of first passage time models we extend the model introduced in [Overbeck and Schmidt, 2005] to address these issues. In the extended a model, a credit quality process is driven by an Itô integral with respect to a Brownian motion with stochastic volatility. Using a representation of the credit quality process as a time-changed Brownian motion, we derive formulas for conditional default probabilities and credit spreads. An example for a volatility process is the square root of a Lévy-driven Ornstein-Uhlenbeck process. We show that jumps in the volatility translate into jumps in credit spreads. We examine the dynamics of the OS-model and the extended model and provide examples.
- Language
-
Englisch
- Bibliographic citation
-
Series: CPQF Working Paper Series ; No. 21
- Classification
-
Wirtschaft
Asset Pricing; Trading Volume; Bond Interest Rates
Contingent Pricing; Futures Pricing; option pricing
Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies
Mathematical Methods; Programming Models; Mathematical and Simulation Modeling: Other
- Subject
-
gap risk
credit spreads
credit dynamics
first passage time models
Lévy processes
general Ornstein-Uhlenbeck processes
Finanzderivat
Zins
Risikoprämie
Volatilität
Stochastischer Prozess
Theorie
- Event
-
Geistige Schöpfung
- (who)
-
Packham, Natalie
Schlögl, Lutz
Schmidt, Wolfgang M.
- Event
-
Veröffentlichung
- (who)
-
Frankfurt School of Finance & Management, Centre for Practical Quantitative Finance (CPQF)
- (where)
-
Frankfurt a. M.
- (when)
-
2009
- Handle
- Last update
-
10.03.2025, 11:43 AM CET
Data provider
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. If you have any questions about the object, please contact the data provider.
Object type
- Arbeitspapier
Associated
- Packham, Natalie
- Schlögl, Lutz
- Schmidt, Wolfgang M.
- Frankfurt School of Finance & Management, Centre for Practical Quantitative Finance (CPQF)
Time of origin
- 2009
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