JSIAM Letters
Online ISSN : 1883-0617
Print ISSN : 1883-0609
ISSN-L : 1883-0617
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Modeling of contagious downgrades and its application to multi-downgrade protection
Hidetoshi Nakagawa
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2010 Volume 2 Pages 65-68

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Abstract

In this paper, we use a multivariate affine jump process to model the downgrade intensities for several categories of business sector in credit portfolios. Since multivariate affine jump structure enables us to consider self-exciting effects as well as mutually exciting effects, the model can explain the downgrade clusters observed in the Japanese market. Also, we propose a new credit derivative named multi-downgrade protection (MDP) as an application of our model and discuss its fair pricing.

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© 2010 The Japan Society for Industrial and Applied Mathematics
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