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A generalised contagion process with an application to credit risk

Dassios, Angelos and Zhao, Hongbiao (2017) A generalised contagion process with an application to credit risk. International Journal of Theoretical and Applied Finance, 20 (1). ISSN 0219-0249

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Identification Number: 10.1142/S0219024917500030

Abstract

We introduce a class of analytically tractable jump processes with contagion effects by generalising the classical Hawkes process. This model framework combines the characteristics of three popular point processes in the literature: (1) Cox process with CIR intensity; (2) Cox process with Poisson shot-noise intensity; (3) Hawkes process with exponentially decaying intensity. Hence, it can be considered as a self-exciting and externally-exciting point process with mean-reverting stochastic intensity. Essential probabilistic properties such as moments, Laplace transform of intensity process, and probability generating function of point process as well as some important asymptotics have been derived. Some special cases and a method for change of measure are discussed. This point process may be applicable to modelling contagious arrivals of events for various circumstances (such as jumps, transactions, losses, defaults, catastrophes) in finance, insurance and economics with both endogenous and exogenous risk factors within one framework. More specifically, these exogenous factors could contain relatively short-lived shocks and long-lasting risk drivers. We make a simple application to calculate the default probability for credit risk and price defaultable zero-coupon bonds.

Item Type: Article
Official URL: http://www.worldscientific.com/worldscinet/ijtaf
Additional Information: © 2017 World Scientific Publishing Company
Divisions: Statistics
Subjects: H Social Sciences > HG Finance
Sets: Departments > Statistics
Date Deposited: 08 Dec 2016 10:48
Last Modified: 20 Jun 2020 02:22
URI: http://eprints.lse.ac.uk/id/eprint/68558

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