Credit Risk Modeling with Affine Processes
by Darrell Duffie of Stanford University
Abstract: This article combines an orientation to credit risk modeling with an introduction to affine Markov processes, which are particularly useful for financial modeling. We emphasize corporate credit risk and the pricing of credit derivatives. Applications of affine processes that are mentioned include survival analysis, dynamic termucture models, and option pricing with stochastic volatility and jumps. The default-risk applications include default correlation, particularly in first-to-default settings. The reader is assumed to have some background in financial modeling and stochastic calculus.
Keywords: Credit risk, Affine processes, Default correlation, First to default.
Published in: Journal of Banking & Finance, Vol. 29, No. 11, (November 2005), pp. 2751-2802.