Research

Research

Publications
Location: Home -> Research -> Publications -> Content

A Generalised Contagion Process with an Application to Credit Risk

id: 2355 Date: 20170403 status: Published Times:
Magazines   20(1), 1-33
AuthorAngelos Dassios, Hongbiao ZHAO
ContentWe introduce a class of analytically tractable jump processes with contagion effects by generalizing the classical Hawkes process. This model framework combines the characteristics of three popular point processes in the literature: (1) Cox process with CIR intensity; (2) Cox process with Poisson shot-noise intensity; (3) Hawkes process with exponentially decaying intensity. Hence, it can be considered as a self-exciting and externally-exciting point process with mean-reverting stochastic intensity. Essential probabilistic properties such as moments, the Laplace transform of intensity process, and the probability generating function of point process as well as some important asymptotics have been derived. Some special cases and a method for change of measure are discussed. This point process may be applicable to modeling contagious arrivals of events for various circumstances (such as jumps, transactions, losses, defaults, catastrophes) in finance, insurance and economics with both endogenous and exogenous risk factors within one framework. More specifically, these exogenous factors could contain relatively short-lived shocks and long-lasting risk drivers. We make a simple application to calculate the default probability for credit risk and to price defaultable zero-coupon bonds.
JEL-Codes
KeywordsCredit risk; contagion risk; stochastic intensity model; jump process; point process; self-exciting process; Hawkes process; Cox process; CIR process; dynamic contagion process
TOP