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research article
Linear credit risk models
We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear-rational in the factors. The price of a CDS option can be uniformly approximated by polynomials in the factors. Multi-name models can produce simultaneous defaults, generate positively as well as negatively correlated default intensities, and accommodate stochastic interest rates. A calibration study illustrates the versatility of these models by fitting CDS spread time series. A numerical analysis validates the efficiency of the option price approximation method.
Type
research article
Web of Science ID
WOS:000488944800001
Authors
Publication date
2020
Published in
Volume
24
Start page
169
End page
214
Peer reviewed
REVIEWED
EPFL units
Available on Infoscience
October 19, 2019
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