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dc.contributor.authorPackham, Natalieen_US
dc.contributor.authorSchlögl, Lutzen_US
dc.contributor.authorSchmidt, Wolfgang M.en_US
dc.description.abstractThe 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 Itô 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 Lévy-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.en_US
dc.publisherFrankfurt School of Finance & Management Frankfurt, M.en_US
dc.relation.ispartofseriesCPQF Working Paper Series 22en_US
dc.subject.keywordgap risken_US
dc.subject.keywordcredit spreadsen_US
dc.subject.keywordcredit dynamicsen_US
dc.subject.keywordfirst passage time modelsen_US
dc.subject.keywordstochastic volatilityen_US
dc.subject.keywordgeneral Ornstein-Uhlenbeck processesen_US
dc.subject.stwCredit Default Swapen_US
dc.subject.stwStochastischer Prozessen_US
dc.titleCredit gap risk in a first passage time model with jumpsen_US
dc.typeWorking Paperen_US
Appears in Collections:CPQF Working Paper Series, Frankfurt School of Finance and Management

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