Generalized Affine Model for Credit Risk Analysis

Abstract

The main goal of this paper is to provide a generalised version of the Affine Model for Credit Risk Analysis, introduced by Gourieroux, Monfort and Polimenis (2003), for pricing securities exposed to such a risk, as the defaultable corporate bonds, and measuring portfolio risk. The assessment of credit risk is an important tool in risk management. Managing a corporate bond portfolio is much more difficult and complicated than managing a treasury bond (T-bond) portfolio. We focus on the case of default of one firm in the same framework as the Affine Model for Credit Risk Analysis where, for sake of simplicity, the assumption of zero-recovery rate is made. The idea behind the model is the following: there are two types of factors, which generate individual default. Firstly, all firms are influenced by a common pool of economic factors called general factors, such as the macroeconomic situation, the business cycle, the GDP (Gross National Product) gap, etc. Secondly, we consider the corporate specific factors which allow for considering the default occurrences of a given corporate at different points in time. Given the past, present and future values of these common factors, individual defaults become independent.