Title: Ornstein-Uhlenbeck Models for Credit Risk
Citation: Proceedings of the 4th Actuarial and Financial Mathematics Day p. 55-64
Publisher: Royal Flemish Academy of Belgium for Science and Arts
Publication Year: 2006
JRC Publication N°: JRC33127
URI: http://publications.jrc.ec.europa.eu/repository/handle/JRC33127
Type: Contributions to Conferences
Abstract: This work presents a reduced-form credit risk model driven by pure-jumps Ornstein-Uhlenbeck (OU) process. We analyse the case of the Gamma and Inverse Gaussian OU processes and show that the default probability can be expressed in closed-form through the characteristic function of the integrated OU process. The model is calibrated to a series of real-market credit default swap term structures. Results are compared with the well known cases of Poisson and CIR dynamics. We finally price a digital default put and show that models with pretty similar survival probabilities result in sometimes different option prices.
JRC Institute:Institute for the Protection and Security of the Citizen

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