Density Approach in Modeling Successive Defaults
Abstract
We apply the density framework developed in [N. El Karoui, M. Jeanblanc, and Y. Jiao, Stochastic Process. Appl., 120 (2010), pp. 1011--1032] to the modeling of successive multiple defaults. Under the hypothesis of existence of the joint density of the ordered default times with respect to a reference filtration, we present general pricing results and establish links with the classical intensity approach; in particular, we emphasize the impact of default events at successive default times. Explicit models, constructed using the methods of change of probability measure or dynamic copula, are proposed.
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© 2015, Society for Industrial and Applied Mathematics.
History
Submitted: 3 October 2013
Accepted: 21 November 2014
Published online: 13 January 2015
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