Successive Correlated Defaults in a Structural Model

30 Pages Posted: 30 May 2004

See all articles by Lisa R. Goldberg

Lisa R. Goldberg

University of California, Berkeley; Aperio Group

Kay Giesecke

Stanford University - Department of Management Science & Engineering

Date Written: May 25, 2004

Abstract

We propose a multi-firm first-passage credit model in which investors have incomplete information. In this model, investors cannot observe a firm's value process and its default barrier process. The model accounts for the short term risk inherent in default events, the market-wide impact of defaults on security prices due to counterparty relations between firms, and the cyclical default correlation effects observed in credit markets. We explicitly calculate the pricing trend and the arrival intensity of the first, second, etc. default. These results furnish (1) tractable reduced form formulas for arrival probabilities of successive correlated defaults and prices of multi-name credit derivatives that depend on the first, second etc. default, and (2) an algorithm for the simulation of successive unpredictable default times.

Keywords: Correlated defaults, incomplete information, pricing trend, intensity, simulation, first-to-default, second-to-default

JEL Classification: G13

Suggested Citation

Goldberg, Lisa R. and Giesecke, Kay, Sequential Defaults and Incomplete Information (August 9, 2004). Available at SSRN: https://ssrn.com/abstract=580141 or http://dx.doi.org/10.2139/ssrn.580141

Lisa R. Goldberg

University of California, Berkeley ( email )

Department of Statistics
367 Evans Hall
Berkeley, CA 94720-3860
United States

Aperio Group ( email )

3 Harbor Drive
Suite 315
Sausalito, CA 94965
United States

Kay Giesecke (Contact Author)

Stanford University - Department of Management Science & Engineering ( email )

475 Via Ortega
Stanford, CA 94305
United States
(650) 723 9265 (Phone)
(650) 723 1614 (Fax)

HOME PAGE: http://https://giesecke.people.stanford.edu

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