An Intensity-based Approach for Equity Modeling

This paper analyzes an intensity based approach for equity modeling. We use the Cox-Ingersoll-Ross (CIR) process to describe the intensity of the firm's default process. The intensity is purposely linked to the assets of the firm and consequently is also used to explain the equity. We examine two different approaches to link assets and intensity and derive closed-form expressions for the firms' equity in both models. We use the Kalman filter to estimate the parameters of the unobservable intensity process. The applicability of the presented methods is demonstrated on real data working with historical time series of Merrill Lynch.      «

This paper analyzes an intensity based approach for equity modeling. We use the Cox-Ingersoll-Ross (CIR) process to describe the intensity of the firm's default process. The intensity is purposely linked to the assets of the firm and consequently is also used to explain the equity. We examine two different approaches to link assets and intensity and derive closed-form expressions for the firms' equity in both models. We use the Kalman filter to estimate the parameters of the unobservable intensi...     »