Pricing Mitigation and Contagion Effect of Guaranteed Debt in Interacting Intensity Model

Li, Songgong; Bao, Qunfang; Li, Shenghong; Liu, Guimei

doi:10.1109/bife.2010.42

Cited by 1 publication

(2 citation statements)

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“…A term Conditional Odds Ratio is defined to set up a criterion for gauging the difference between mitigation effect and contagion risk in a pair of guaranteed debt. This paper extends Li and Bao [11]'s work to allow stochastic default intensities which are driven by Brownian motions..…”

Section: Introductionmentioning

confidence: 75%

“…Therefore, a natural question would be to exactly evaluate both of these two effects so as to tell whether banks should use guaranty to mitigate in those particular loans. Li and Bao [11] establishes a framework for analysis of mitigation and contagion effect of guaranteed debt where contagion is modeled by interacting intensities with constant parameters. Analytical solutions are attained through the approach of survival measure.…”

Section: Introductionmentioning

confidence: 99%

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Survival Measures and Interacting Intensity Model: With Applications in Guaranteed Debt Pricing

Bao¹,

Li²,

Liu³

2010

SSRN Journal

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This paper studies survival measures in credit risk models. Survival measure, which was first introduced by Schönbucher [12] in the framework of defaultable LMM, has the advantage of eliminating default indicator variable directly from the expectation by absorbing it into Randon-Nikodym density process. Survival measure approach was further extended by Collin-Duresne [4] to avoid calculating a troublesome jump in IBPR reducedform model. This paper considers survival measure in "HBPR" model, i.e. default time is characterized by Cox construction, and studies the relevant drift changes and martingale representations. This paper also takes advantage of survival measure to solve the looping default problem in interacting intensity model with stochastic intensities. Guaranteed debt is priced under this model, as an application of survival measure and interacting intensity model. Detailed numerical analysis is performed in this paper to study influence of stochastic pre-default intensities and contagion on value of a two firms' bilateral guaranteed debt portfolio.JEL classification: G12; G13

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Section: Introductionmentioning

confidence: 75%

Section: Introductionmentioning

confidence: 99%