Dependent Defaults and Credit Migrations

by Tomasz R. Bielecki of The Northeastern Illinois University, and
Marek Rutkowski of the Warsaw University of Technology

March 11, 2003

Abstract: The paper deals with the modeling of mutually dependent default times of several credit names through the intensity-based approach. We extend to the case of multiple ratings some previous results due to Schmidt (1998), Kusuoka (1999) and Jarrow and Yu (2001). The issue of the arbitrage valuation of simple basket credit derivatives is also briefly examined. We argue that our approach leads, in some cases, to a reduce significantly of the dimensionality of the valuation problem at hand.

AMS Classification: 60J27, 91B70.

Keywords: dependent defaults, credit migrations, arbitrage valuation.

Published in: Applicationes Mathematicae, Vol. 30, No. 2, (2003), pp. 121-145.

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