Valuing credit default swap in a non-homogeneous semi-Markovian rating based model |
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Authors: | Guglielmo D’Amico Jacques Janssen Raimondo Manca |
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Affiliation: | (1) Dipartimento di Matematica per le Decisioni Economiche, Finanziarie ed Assicurative Universitá “La Sapienza”, via del Castro Laurenziano, 9, 00161 Roma, Italy;(2) CESIAF, Bld Paul Janson, 84 bte 9, 6000 Charleroi, Belgium |
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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. |
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Keywords: | Non-homogeneous semi-Markov processes Credit risk Stochastic recovery rate Default swap Reliability |
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