@techreport{Packham2009Credit,
abstract = {The payoff of many credit derivatives depends on the level of credit spreads. In particular, credit derivatives with a leverage component are subject to gap risk, a risk associated with the occurrence of jumps in the underlying credit default swaps. In the framework of first passage time models, we consider a model that addresses these issues. The principal idea is to model a credit quality process as an It\^{o} integral with respect to a Brownian motion with a stochastic volatility. Using a representation of the credit quality process as a time-changed Brownian motion, one can derive formulas for conditional default probabilities and credit spreads. An example for a volatility process is the square root of a L\'{e}vy-driven Ornstein-Uhlenbeck process. The model can be implemented efficiently using a technique called Panjer recursion. Calibration to a wide range of dynamics is supported. We illustrate the effectiveness of the model by valuing a leveraged credit-linked note.},
address = {Frankfurt, M.},
author = {Natalie Packham and Lutz Schl\"{o}gl and Wolfgang M. Schmidt},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {G12; G13; G24; C69; 330; gap risk; credit spreads; credit dynamics; first passage time models; stochastic volatility; general Ornstein-Uhlenbeck processes; Finanzderivat; Zins; Risikopr\"{a}mie; Credit Default Swap; Volatilit\"{a}t; Stochastischer Prozess; Theorie},
language = {eng},
number = {22},
publisher = {Frankfurt School of Finance & Management},
title = {Credit gap risk in a first passage time model with jumps},
type = {CPQF Working Paper Series},
url = {http://hdl.handle.net/10419/40179},
year = {2009}
}