Journal
JOURNAL OF COMPUTATIONAL AND APPLIED MATHEMATICS
Volume 381, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.cam.2020.113037
Keywords
Default clustering; Hawkes process; Jump clustering; Default correlation
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Ma and Xu (2016) proposed a Hawkes jump-diffusion model for the firm's value to describe the unexpectedness of default and default clustering in the framework of Merton's structural default. They presented a closed-form solution for the probability of default and the default correlation using the characteristic function, which can substantially improve computational efficiency for the problem.
Ma and Xu (2016) proposed a Hawkes jump-diffusion model for the firm's value to describe the unexpectedness of default and default clustering in the framework of Merton's structural default. However, the authors resorted to Monte-Carlo simulations for the calculation of the default probability and the default correlation, as no other solution method was available in the literature. In this note, we present a closed-form solution for the probability of default and the default correlation using the characteristic function. Our new solution can substantially improve the computational efficiency for the problem. (C) 2020 Elsevier B.V. All rights reserved.
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