A reduced-form intensity model containing noise interference

Abstract

OTC financial derivatives are non-standardized face-to-face financial contracts its trading environment is characterized by less information, information disclosure may be distorted, and no exchange protection. It results in asymmetric information on the opponent, and obtains asymmetric information with noise interference. However, the default intensity is a function of information of market state variables, so the noise interference of market information will have an important impact on the default intensity. Therefore, the noise interference factor is added to the construction of the default intensity in this paper, and a new default intensity model with noise interference is proposed. The simulation results show that, the emergence of noise interference will increase the default probability of enterprises, and when the bi-directional noise interference disappears, the survival probability of enterprises is raised to a certain limit. Compared with the existing default intensity models, the noise interference term is added to the construction of the default intensity model for the first time, and can make the default model take into account more sources of default, make the model closer to the real OTC market. At the same time, simulation results also verify the effectiveness of the proposed model. ARTICLE HISTORY