An analysis of default correlations and multiple defaults |
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Authors: | Zhou C |
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Institution: | Anderson, Graduate School of Management, University of California, Riverside, CA 92521, USA
E-mail: chunsheng.zhou@ucr.edu |
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Abstract: | Evaluating default correlations or the probabilities of defaultby more than one firm is an important task in credit analysis,derivatives pricing, and risk management. However, default correlationscannot be measured directly, multiple-default modeling is technicallydifficult, and most existing credit models cannot be appliedto analyze multiple defaults. This article develops a first-passage-timemodel, providing an analytical formula for calculating defaultcorrelations that is easily implemented and conveniently usedfor a variety of financial applications. The model also providesa theoretical justification for several empirical regularitiesin the credit risk literature. |
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