Credit Contagion in a Long Range Dependent Macroeconomic Factor Model

Biagini, Francesca ; Fuschini, Serena and Klüppelberg, Claudia (2011): Credit Contagion in a Long Range Dependent Macroeconomic Factor Model. In: Di Nunno, Giulia and Øksendal, Bernt (eds.) : Advanced Mathematical Methods for Finance. Heidelberg: Springer. pp. 105-132

Abstract

We propose a new default contagion model, where default may originate from the performance of a specific firm itself but can also be directly influenced by defaults of other firms. The default intensities of our model depend on smoothly varying macroeconomic variables, driven by a long-range dependent process. In particular, we focus on the pricing of defaultable derivatives whose defaults depend on the macroeconomic process and may be affected by the contagion effect. In our approach we are able to provide explicit formulas for prices of defaultable derivatives at any time t∈[0,T]. Finally we calculate some examples explicitly, where the macroeconomic factor process is given by a functional of the fractional Brownian motion with Hurst index H > 1/2.

• Item Type: Book Section
• Faculties: Mathematics, Computer Science and Statistics > Mathematics > Workgroup Financial Mathematics
• Subjects: 500 Science > 510 Mathematics
• ISBN: 978-3-642-18411-6 ; 978-3-642-43551-5 ; 978-3-642-18412-3
• Place of Publication: Heidelberg
• Language: English