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SOE: Fachverband Physik sozio-ökonomischer Systeme
SOE 18: Financial Markets and Risk Management I
SOE 18.9: Vortrag
Donnerstag, 17. März 2011, 12:30–12:45, GÖR 226
Dependence of defaults and recoveries in credit risk models — •Rudi Schäfer1 and Alexander Koivusalo2 — 1Fakultät für Physik, Universität Duisburg-Essen, Germany — 2Danske Capital, Copenhagen, Denmark
In view of the recent financial crises the modelling of credit risk is of great importance. There are two fundamentally different modelling approaches: the structural approach which derives both default events and recovery rates from the value of an underlying process at maturity time. And the reduced form approach where defaults and recovery rates are modelled independently. First, we discuss the structural model with correlated diffusion analytically. We find a functional relation between default probabilities and recovery rates with only a single parameter. Although derived for the diffusion case, we demonstrate in Monte-Carlo simulations that the same relation also holds for other processes in very good approximation. We discuss how to incorporate this relation into reduced form models, in order to restore essential structural information which is usually neglected in the reduced form approach.