{"title":"On Modelling Credit Risk Using Arbitrage Free Models","authors":"Frank S. Skinner, A. Díaz","doi":"10.2139/ssrn.264958","DOIUrl":null,"url":null,"abstract":"By examining the distribution of state prices obtained from binomial versions of Jarrow and Turnbull (1995), Lando (1998) and Duffie and Singleton (1999), we are able to suggest which credit risk parameters are of critical interest. We find that it appears worthwhile to parameterize credit risk since even the simplest parameterized model obtains large changes in the distribution of state prices when compared to a non-parameterized model. Similarly we find large differences in the distribution of state prices as we add correlation and moderate changes as we add time varying recovery rates. Finally, the choice between the RM or RF recovery assumption appears innocuous, but the choice between RT and these two recovery assumptions is not.","PeriodicalId":126917,"journal":{"name":"European Financial Management Association Meetings (EFMA) (Archive)","volume":null,"pages":null},"PeriodicalIF":0.0000,"publicationDate":"2000-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"7","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"European Financial Management Association Meetings (EFMA) (Archive)","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.264958","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 7
Abstract
By examining the distribution of state prices obtained from binomial versions of Jarrow and Turnbull (1995), Lando (1998) and Duffie and Singleton (1999), we are able to suggest which credit risk parameters are of critical interest. We find that it appears worthwhile to parameterize credit risk since even the simplest parameterized model obtains large changes in the distribution of state prices when compared to a non-parameterized model. Similarly we find large differences in the distribution of state prices as we add correlation and moderate changes as we add time varying recovery rates. Finally, the choice between the RM or RF recovery assumption appears innocuous, but the choice between RT and these two recovery assumptions is not.
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