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- Title
Estimation of physical intensity models for default risk.
- Authors
Denault, Michel; Gauthier, Geneviève; Simonato, Jean-Guy
- Abstract
The estimation of physical intensity processes in the context of default risk is investigated here. Using data from Moody's Corporate Bond Default Database, a term structure of default probabilities for different rating classes is constructed each year from 1970 to 2001. Two specifications used for modeling the dynamics of the (risk-neutral) intensity process in the bond-pricing literature are then examined empirically: the Ornstein–Uhlenbeck and square-root cases. The results reveal that the Ornstein–Uhlenbeck case is not an adequate modeling alternative with a rejection of this specification in five out of seven credit classes and nonsignificant mean reverting behavior for all credit classes. The square-root case obtains better results with four credit classes out of seven for which this specification cannot be rejected and significant mean reversion parameters in many cases. © 2008 Wiley Periodicals, Inc. Jrl Fut Mark 29:95–113, 2009
- Subjects
DEFAULT (Finance); BOND market; ORNSTEIN-Uhlenbeck process; FINANCIAL statements; STOCK exchanges; FINANCIAL institutions; PROBABILITY theory; KALMAN filtering; CREDIT
- Publication
Journal of Futures Markets, 2009, Vol 29, Issue 2, p95
- ISSN
0270-7314
- Publication type
Article
- DOI
10.1002/fut.20353