A Simple Model for Credit Migration and Spread Curves

by Li Chen of Princeton University, and
Damir Filipović of the Federal Office of Private Insurance, Switzerland

May 26, 2004

Abstract: We propose and examine a simple model for credit migration and spread curves of a single firm both under real-world and risk-neutral measures. This model is a hybrid of a structural and a reduced-form model. Default is triggered either by successive downgradings of the firm or an unpredictable jump of the state process. The default time is accordingly decomposed into predictable and totally inaccessible part.

JEL Classification: G12, G13.

AMS Classification: 60J25, 60J75.

Keywords: credit risk model, affine process, equivalent change of measure.

Published in: Finance and Stochastics, Vol. 9, No. 2, (April 2005), pp. 211-231.

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