Abstract
In this paper, we use a discrete time non-homogeneous semi-Markov model for the rating evolution of the credit quality of a firm C (see D’Amico, Janssen, and Manca Proceedings of the II international workshop in applied probablity, 2004a) and we determine the credit default swap spread for a contract between two parties, A and B that, respectively, sell and buy a protection about the failure of the firm C. We work both in the case of deterministic and stochastic recovery rate. We also highlight the link between credit risk and reliability theory.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Barbu V., Boussemart M., Limnios N. (2004) Discrete time semi-Markov model for reliability and survival analysis. Communications in Statistics, Theory and Method 33(11): 2833–2868
Berthault, A., Gupton, G., & Hamilton, D. T. (2001). Default and recovery rates of corporate bond issuers: 2000. Moody’s investors service special comment, february. New York: Moody’s.
Blasi A., Janssen J., Manca R. (2004) Numerical treatment of homogeneous and non- homogeneous semi-Markov reliability models. Communications in Statistics, Theory and Method 33: 697–714
Carty, L., & Fons, J. (1994). Measuring changes in corporate credit quality. The Journal of Fixed Income, June, 66–78.
D’Amico, G., Janssen, J., & Manca, R. (2004a). Non-homogeneous semi-Markov reliability transition credit risk models. In: Proceedings of the II international workshop in applied probability. Athens.
D’Amico, G., Janssen, J., & Manca, R. (2004b). Downward credit risk problem and non-homogeeous semi-markov reliability transition models. In: Proceedings of the 8-th international congress on insurance: Mathematics and economics. Roma.
D’Amico, G., Janssen, J., & Manca, R. (2004c). Credit default swap: A semi-Markov approach. In: Proceedings of the 8-th international congress on insurance: Mathematics and economics. Roma.
D’Amico, G., Janssen, J., & Manca, R. (2004d). Transient analysis of non-homogeneous recurrence times processes and application in option pricing.
D’Amico G., Janssen J., Manca R. (2005) Homogeneous semi-Markov reliability models for credit risk management. Decisions in Economics and Finance 28: 79–93
Howard, R. (1971). Dynamic probabilistic systems (Vols II, XVIII, 577, 1108). New York: Wiley.
Limnios N., Opriçan G. (2000) Semi-Markov processes and reliability modeling. World Scientific, Singapore
Millossovich, P. (2002). An extension of the Jarrow-Lando-Turnbull model to random recovery rate. In: Working Paper Dipartimento di Matematica Applicata, Universitá di Trieste.
Nickell P. Perraudin W., Varotto S. (2000) Stability of rating transitions. Journal of Banking and Finance 24: 203–227
Qureshi M.A., Sanders H.W. (1994) Reward model solution methods with impulse and rate rewards: An algorithmic and numerical results. Performance Evaluation 20: 413–436
Silvestrov D.S. Stenberg F. (2004). A pricing process with stochastic volatility controlled by a semi-Markov process. Communications in Statistics, Theory and Method 33: 591–608
Standard Poor’s (2001). Rating performance 2000 default, transition, recovery and spreads. Standard & Poor’s, New York
Svishchuk A.V. (1995) Hedging of options under mean-square criterion and semi-Markov volatility. Ukrainian Mathematical Journal 7: 1119–1127
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
D’Amico, G., Janssen, J. & Manca, R. Valuing credit default swap in a non-homogeneous semi-Markovian rating based model. Comput Econ 29, 119–138 (2007). https://doi.org/10.1007/s10614-006-9080-0
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10614-006-9080-0