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: | Janssen Jacques, D'Amico Guglielmo, Manca Raimondo |
Keywords: | markov processes |
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.