EconStor >
Frankfurt School of Finance and Management, Frankfurt a. M. >
CPQF Working Paper Series, Frankfurt School of Finance and Management >

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10419/40190
  
Title:Credit dynamics in a first passage time model with jumps PDF Logo
Authors:Packham, Natalie
Schlögl, Lutz
Schmidt, Wolfgang M.
Issue Date:2009
Series/Report no.:CPQF Working Paper Series 21
Abstract: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.
Subjects:gap risk
credit spreads
credit dynamics
first passage time models
Lévy processes
general Ornstein-Uhlenbeck processes
JEL:G12
G13
G24
C69
Document Type:Working Paper
Appears in Collections:CPQF Working Paper Series, Frankfurt School of Finance and Management

Files in This Item:
File Description SizeFormat
614452759.pdf428.35 kBAdobe PDF
No. of Downloads: Counter Stats
Download bibliographical data as: BibTeX
Share on:http://hdl.handle.net/10419/40190

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.