Mathematical Finance Seminar

April 10, 2003 , 5:30 PM to 7:00 PM

Damir Filipovic, Princeton University

A Simple Model for Credit Migration and Spread Curves

We propose and examine a simple affine multi-factor model for credit migration and spread curves, under both the real-world and risk-neutral measures. The credit rating is modelled as a monotone function of one of the factors, say Y, which takes values between 0 (best rating) and infinity (default). The resulting real-world survival probabilities as well as the spread curves have an explicit (exponential-)affine dependence on Y, the short rate and possibly additional factors.