Abstract
Credit contagion means that the credit deterioration of an entity causes the credit deterioration of other entities. In this paper, we build and test a continuous-time model for defaultable securities using a diffusive process for risk-free interest rate, and a finite-state continuous-time Markov process for the correlation of credit. The credit contagion, in particular, is established by relating transition rates of various credit states. Examples of derivative pricing with calibrated credit contagion model are provided. Initial empirical results with the benchmarks of Brady bonds show that our model is a viable new technique for the pricing and risk-managing of credit derivatives.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: International Journal of Theoretical and Applied Finance
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
