2016/03/09 by Yu, Feng-Hui, Ching, Wai-Ki, Gu, Jia-Wen +1
#Computational Finance (q-fin.CP) #FOS: Economics and business
paper · doi:10.48550/arxiv.1603.02902
In this paper we consider a reduced-form intensity-based credit risk model with a hidden Markov state process. A filtering method is proposed for extracting the underlying state given the observation processes. The method may be applied to a wide range of problems. Based on this model, we derive the joint distribution of multiple default times without imposing stringent assumptions on the form of default intensities. Closed-form formulas for the distribution of default times are obtained which are then applied to solve a number of practical problems such as hedging and pricing credit derivatives. The method and numerical algorithms presented may be applicable to various forms of default intensities.