[go: up one dir, main page]

IDEAS home Printed from https://ideas.repec.org/p/hhb/aarbfi/2009-01.html
   My bibliography  Save this paper

Sato Processes in Default Modeling

Author

Listed:
  • Kokholm, Thomas

    (Department of Business Studies, Aarhus School of Business)

  • Nicolato, Elisa

    (Department of Business Studies, Aarhus School of Business)

Abstract
In reduced form default models, the instantaneous default intensity is classically the modeling object. Survival probabilities are then given by the Laplace transform of the cumulative hazard defined as the integrated intensity process. Instead, recent literature has shown a tendency towards specifying the cumulative hazard process directly. Within this framework we present a new model class where cumulative hazards are described by self-similar additive processes, also known as Sato processes. Furthermore we also analyze specifications obtained via a simple deterministic time-change of a homogeneous Levy process. While the processes in these two classes share the same average behavior over time, the associated intensities exhibit very different properties. Concrete specifications are calibrated to data on the single names included in the iTraxx Europe index. The performances are compared with those of a recently proposed class of intensity models based on Ornstein-Uhlenbeck type processes. It is shown how the time-inhomogeneous Levy models achieve comparable calibration errors with fever parameters, and with more stable parameter estimates over time. However, the calibration performances of the Sato processes and the time-change specifications are practically indistinguishable

Suggested Citation

  • Kokholm, Thomas & Nicolato, Elisa, 2009. "Sato Processes in Default Modeling," Finance Research Group Working Papers F-2009-01, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  • Handle: RePEc:hhb:aarbfi:2009-01
    as

    Download full text from publisher

    File URL: http://research.asb.dk/fbspretrieve/3853/F-2009-01
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    credit default swap; reduced form model; Sato process; time-changed Lévy process; cumulative hazard;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhb:aarbfi:2009-01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Helle Vinbaek Stenholt (email available below). General contact details of provider: https://edirc.repec.org/data/ifhhadk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.