Term Structure Models with Shot-Noise Effects

ISEG Advance Working Paper No. 3/2007

18 Pages Posted: 4 Jul 2008 Last revised: 15 Dec 2010

See all articles by Raquel M. Gaspar

Raquel M. Gaspar

ISEG and Cemapre/REM, Universidade de Lisboa

Thorsten Schmidt

University of Freiburg

Date Written: July 1, 2007

Abstract

This work proposes term structure models consisting of two parts: a part which can be represented in exponential quadratic form and a shot noise part. These term structure models allow for explicit expressions of various derivatives. In particular, they are very well suited for credit risk models.

The goal of the paper is twofold. First, a number of key building blocks useful in term structure modelling are derived in closed-form. Second, these building blocks are applied to single and portfolio credit risk. This approach generalizes Duffie & Gýrleanu (2001) and is able to produce realistic default correlation and default clustering. We conclude with a specific model where all key building blocks are computed explicitly.

Keywords: Term Structure Models, Quadratic Term Structure Models, Shot-noise

JEL Classification: C15, C12, G13, G33

Suggested Citation

Gaspar, Raquel M. and Schmidt, Thorsten, Term Structure Models with Shot-Noise Effects (July 1, 2007). ISEG Advance Working Paper No. 3/2007, Available at SSRN: https://ssrn.com/abstract=1155130 or http://dx.doi.org/10.2139/ssrn.1155130

Raquel M. Gaspar (Contact Author)

ISEG and Cemapre/REM, Universidade de Lisboa ( email )

Rua Miguel Lupi, 20
room 510
Lisbon, 1249-078
Portugal

Thorsten Schmidt

University of Freiburg ( email )

Fahnenbergplatz
Freiburg, D-79085
Germany

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