Modeling of Contagious Downgrades and its Application to Multi-Downgrade Protection

25 Pages Posted: 24 Dec 2010

See all articles by Hidetoshi Nakagawa

Hidetoshi Nakagawa

Hitotsubashi University Business School

Date Written: June 19, 2010

Abstract

In this paper, we use a multivariate affine jump process to model the downgrade intensities for several categories of business sector in credit portfolios. Since multivariate affine jump structure enables us to consider self-exciting effects as well as mutually exciting effects, the model can explain the downgrade clusters observed in the Japanese market. Also, we propose a new credit derivative named multi-downgrade protection (MDP) as an application of our model and discuss its fair pricing.

Keywords: downgrade risk, mutually exciting intensity model, downgrade protection

Suggested Citation

Nakagawa, Hidetoshi, Modeling of Contagious Downgrades and its Application to Multi-Downgrade Protection (June 19, 2010). Available at SSRN: https://ssrn.com/abstract=1730802 or http://dx.doi.org/10.2139/ssrn.1730802

Hidetoshi Nakagawa (Contact Author)

Hitotsubashi University Business School ( email )

National Center for Sciences
2-1-2 Hitotsubashi,
Chiyoda-ku,, 1018439
Japan
342123104 (Phone)

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