Hawkes-diffusion process and the conditional probability of defaults in the Eurozone

Kim, Jungmu; Park, Yuen Jung; Ryu, Doojin

doi:10.1016/j.physa.2015.12.087

Cited by 5 publications

(2 citation statements)

References 19 publications

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“…Davis and Lo [5] modeled the arrival of defaults by a piecewise deterministic Markov process. Recently, Kim et al [15] considered a Hawkes jump-diffusion process to model the conditional probability of defaults in the Eurozone. Giesecke [10] gives a comparison between the two approaches for portfolio credit risk.…”

Section: Literature Surveymentioning

confidence: 99%

A contagion process with self-exciting jumps in credit risk applications

Pasricha,

Selvamuthu,

Natarajan

2022

Preprint

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The modeling of the probability of joint default or total number of defaults among the firms is one of the crucial problems to mitigate the credit risk since the default correlations significantly affect the portfolio loss distribution and hence play a significant role in allocating capital for solvency purposes. In this article, we derive a closed-form expression for the probability of default of a single firm and the probability of the total number of defaults by any time t in a homogeneous portfolio of firms. We use a contagion process to model the arrival of credit events that causes the default and develop a framework that allows firms to have resistance against default unlike the standard intensity-based models. We assume the point process driving the credit events to be composed of a systematic and an idiosyncratic component, whose intensities are independently specified by a mean-reverting affine jump-diffusion process with self-exciting jumps. The proposed framework is competent of capturing the feedback effect, an empirically observed phenomenon in the default events. We further demonstrate how the proposed framework can be used to price synthetic collateralized debt obligation (CDO) and obtain a closed-form solution for tranche spread. Finally, we present the sensitivity analysis to demonstrate the effect of different parameters governing the contagion effect on the spread of tranches and the expected loss of the CDO.

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Section: Literature Surveymentioning

confidence: 99%

A contagion process with self-exciting jumps in credit risk applications

Pasricha,

Selvamuthu,

Natarajan

2022

Preprint

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“…Many studies report a contagion effect of the European debt crisis. See for example, Beirne and Fratzscher (2013), Gorea and Radev (2014), Kim, Park, and Ryu (2016), and Mink and Haan (2013), among others. In this regard, the postcrisis period in the U.S. market cannot be considered either a purely normal or purely (endogenously) turbulent term.…”

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Investor Sentiment and Credit Default Swap Spreads During the Global Financial Crisis

Lee

Kim

Park

2016

Journal of Futures Markets

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This paper examines whether investor sentiment can predict credit default swap (CDS) spread changes. Among several proxies for investor sentiment, change in equity put–call ratio performs best in predicting variation in CDS spread changes in both firm‐ and portfolio‐level regressions; in particular, the explanatory power of this proxy is greater for non‐investment‐grade firms than for investment‐grade firms. More importantly, sentiment may be a critical factor in determining CDS spread changes during the global financial crisis and may best explain the differences in CDS spread in the group of firms whose leverage ratio and stock volatility are highest. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark 37:660–688, 2017

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Credit default swap pricing with counterparty risk in a reduced form model with Hawkes process

Xing,

Wang,

2024

Communications in Statistics - Theory and Methods

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Hawkes-diffusion process and the conditional probability of defaults in the Eurozone

Cited by 5 publications

References 19 publications

A contagion process with self-exciting jumps in credit risk applications

A contagion process with self-exciting jumps in credit risk applications

Investor Sentiment and Credit Default Swap Spreads During the Global Financial Crisis

Credit default swap pricing with counterparty risk in a reduced form model with Hawkes process

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