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|Title:||Ornstein-Uhlenbeck Models for Credit Risk|
|Authors:||CARIBONI Jessica; SCHOUTENS Wim|
|Citation:||Proceedings of the 4th Actuarial and Financial Mathematics Day p. 55-64|
|Publisher:||Royal Flemish Academy of Belgium for Science and Arts|
|JRC Publication N°:||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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