Homogeneous semi-Markov reliability models for credit risk management

Homogeneous semi-Markov reliability models for credit risk management

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Article ID: iaor20062145
Country: Italy
Volume: 28
Issue: 2
Start Page Number: 79
End Page Number: 93
Publication Date: Feb 2006
Journal: Decisions in Economics and Finance
Authors: , ,
Keywords: markov processes
Abstract:

The credit risk problem is one of the most important issues of modern financial mathematics. Fundamentally it consists in computing the default probability of a company going into debt. The problem can be studied by means of Markov transition models. The generalization of the transition models by means of homogeneous semi-Markov models is presented in this paper. The idea is to consider the credit risk problem as a reliability problem. In a semi-Markov environment it is possible to consider transition probabilities that change as a function of waiting time inside a state. The paper also shows how to apply semi-Markov reliability models in a credit risk environment. In the last section an example of the model is provided.

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