Wilfrid Laurier University Researchers Update Current Study Findings on Risk Management (Spectral Expansions for Credit Risk Modelling with Occupation Times): Insurance – Risk Management

2023 JAN 06 (NewsRx) -- By a News Reporter-Staff News Editor at NewsRx Policy and Law Daily -- Investigators discuss new findings in risk management. According to news reporting from Waterloo, Canada, by NewsRx journalists, research stated, “We study two credit risk models with occupation time and liquidation barriers: the structural model and the hybrid model with hazard rate. The defaults within the models are characterized in accordance with Chapter 7 (a liquidation process) and Chapter 11 (a reorganization process) of the U.S.”

Financial supporters for this research include Natural Sciences And Engineering Research Council.

Our news journalists obtained a quote from the research from Wilfrid Laurier University: “Bankruptcy Code. The models assume that credit events trigger as soon as the occupation time (the cumulative time the firm’s value process spends below some threshold level) exceeds the grace period (time allowance). The hazard rate model extends the structural occupation time models and presumes that other random factors may also lead to credit events. Both approaches allow the firm to fulfill its obligations during the grace period. We derive new closed-from pricing formulas for credit derivatives containing the (risk-neutral) probability of defaults and credit default swap (CDS) spreads as special cases, which are derived analytically via a spectral expansion methodology. Our method works for any solvable diffusion, such as the geometric Brownian motion (GBM) and several state-dependent volatility processes, including the constant elasticity of variance (CEV) model. It allows us to write the pricing formulas explicitly as infinite series that converges rapidly.”

According to the news reporters, the research concluded: “We then calibrate our models (assuming that GBM governs the firm’s value) to market CDS spreads from the Total Energy company. Our calibration results show that the computations are fast, and the fit is near-perfect.”

For more information on this research see: Spectral Expansions for Credit Risk Modelling with Occupation Times. Risks, 2022,10(228):228. (Risks - http://www.mdpi.com/journal/risks). The publisher for Risks is MDPI AG.

A free version of this journal article is available at https://doi.org/10.3390/risks10120228.

Our news editors report that additional information may be obtained by contacting Giuseppe Campolieti, Department of Mathematics, Faculty of Science, Wilfrid Laurier University, 75 University Ave. West, Waterloo, ON N2L 3C5, Canada. Additional authors for this research include Hiromichi Kato, Roman N. Makarov.

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