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Title: Structural models of credit with default contagion
Author: Haworth, H.
ISNI:       0000 0001 3547 5274
Awarding Body: University of Oxford
Current Institution: University of Oxford
Date of Award: 2006
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Multi-asset credit derivatives trade in huge volumes, yet no models exist that are capable of properly accounting for the spread behaviour of dependent companies. In this thesis we consider new ways of incorporating a richer and more realistic dependence structure into multi-firm models. We focus on the structural framework in which firm value is modelled as a geometric Brownian motion, with default as the first hitting time of an exponential default threshold. Specification of a dependence structure consisting of a common driving influence and firm-specific inter-company ties allows for both default causality and default asymmetry and we incorporate default contagion in the first passage framework for the first time. Building on the work by Zhou (2001a), we propose an analytical model for corporate bond yields in the presence of default contagion and two-firm credit default swap baskets. We derive closed-form solutions for credit spreads, and results clearly highlight the importance of dependence assumptions. Extending this framework numerically, we calculate CDS spreads for baskets of three firms with a wide variety of credit dependence specifications. We examine the impact of firm value correlation and credit contagion for symmetric and asymmetric baskets, and incorporate contagion that has a declining impact over time.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: Game theory, mathematical finance, economics, social and behavioral sciences