Title: An affine framework for the joint modelling of equity and credit risk
Abstract: We propose an affine framework for the joint modeling of equity and credit risk. The default time is modeled as a doubly stochastic random time, with intensity given as an affine function of an underlying factor process. This approach allows for rich and flexible interactions between the defaultable stock price, its stochastic volatility and the default intensity and extends several models proposed in the literature. We characterise the set of risk-neutral measures which preserve the affine structure of the model. Then, by shifting to suitable survival measures, we show that many risk-management as well as pricing problems can be easily dealt with. As an example, we consider a jump-to-default extension of the Heston stochastic volatility model.
Publication Year: 2012
Publication Date: 2012-06-06
Language: en
Type: article
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