Pricing Credit Derivatives under Stochastic Recovery in a Hybrid Model

We present a framework for the joint modelling of default and recovery risk. Our model takes account for typical characteristics known from empirical studies, e.g. negative correlation between the recoveryrate process and the default intensity, as well as between the default intensity and the state of the economy, and a positive dependence of recovery rates on the economic environment. Within this framework pricing formulas for credit derivatives are derived. The stochastic model for the recovery process enables us to price credit derivatives with payo s that are directly linked to the recovery rate at default, e.g. recovery locks.      «

We present a framework for the joint modelling of default and recovery risk. Our model takes account for typical characteristics known from empirical studies, e.g. negative correlation between the recoveryrate process and the default intensity, as well as between the default intensity and the state of the economy, and a positive dependence of recovery rates on the economic environment. Within this framework pricing formulas for credit derivatives are derived. The stochastic model for the recover...     »