Implied migration rates from credit barrier models

The risk-neutral credit migration process captures quantitative information which is relevant to the pricing theory and risk management of credit derivatives. In this article, we derive implied migration rates by means of a recently introduced credit barrier model which is calibrated on the basis of...

Full description

Saved in:
Bibliographic Details
Published in:Journal of banking & finance 2006-02, Vol.30 (2), p.607-626
Main Authors: Albanese, Claudio, Chen, Oliver X.
Format: Article
Language:English
Subjects:
Credit rating
Credit ratings
Credit risk
Credit risk modelling
Credit spreads
Default
Default probabilities
Derivatives
Financial economics
Financial models
Financial research
Modelling
Risk management
Spread
Stochastic models
Stochastic processes
Studies
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:The risk-neutral credit migration process captures quantitative information which is relevant to the pricing theory and risk management of credit derivatives. In this article, we derive implied migration rates by means of a recently introduced credit barrier model which is calibrated on the basis of aggregate information such as credit migration rates and credit spread curves. The model is characterized by an underlying stochastic process that represents credit quality, and default events are associated to barrier crossings. The stochastic process has state dependent volatility and jumps which are estimated by using empirical migration and default rates. A risk-neutralizing drift and forward liquidity spreads are estimated to consistently match the average spread curves corresponding to all the various ratings. The implied migration rates obtained with our credit barrier model are then compared with those obtained via the Kijima–Komoribayashi model.
ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2005.04.011