Estimate & Simulation of Correlated Default Risk with Use Stochastic Intensity Model

Subject Areas : Financial Knowledge of Securities Analysis

کریم نوروزی پور ¹ , حسن داداشی ² , مهدی محمدی ³

1 - نویسنده مسئول
2 - ندارد
3 - ندارد

Received: 2011-12-11 Accepted : 2012-03-09 Published : 2012-06-09

Keywords: credit risk, Correlated default, stochastic intensity model,

Abstract :

Correlated default risk plays a significant role in financial markets and business.Primarily because the risk, alongside time value of money and asset valuation arethree components financial analysis. In general, risk and more specifically, Correlateddefault risk are basic elements affecting the financial behavior. There are also risks inthe real world and an important part of the financial system is responsible for thedistribution of risk.With the probability distribution of the assets of the institution, we can and will beenable calculated risk. In this context, Dynamic intensity-based models, in which afirm default is governed by a stochastic intensity process, are widely used to modelcorrelated default risk. The computations in these models can be performed by MonteCarlo simulation. the standard simulation method, which leads to biased simulationestimators. In This study, we reviews and develops an exact simulation method forintensity-based models that leads to unbiased estimators of credit portfolio lossdistributions, risk measures, and derivatives prices.The new method includes two steps. In a first step, we construct same distributionof Markov chains with the default status and in a second step, we compute functionobtained in first step, using accepted / rejected method.