Modeling Of Contagion Effects And Their Influence To The Pricing

Topics:
Commercial Lending,
Pricing and Margins
Tags:
Asset,
Asset Management,
Business Operations,
Firm,
Modeling,
Operational Planning,
Pricing Strategy,
Research & Development,
University Of Cologne
Source:
University of Cologne

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Overview: KMV model adopts the main idea of Merton's framework. It assumes that a firm defaults when the value of its assets is lower than that of its liabilities when its debt matures. The asset value processes are driven by geometric Brownian motions. So the asset value processes are dependent to each other. This induces the dependence among default events. "Distance-to-Default" for every firm can be calculated. Using the historical data we can also estimate the default probability of a firm. The firms are divided into two types: primary and secondary.

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Format: PDF | Size: 506KB | Date: Nov 2005 | Pages: 19

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