Credit contagion in a long range dependent macroeconomic factor model

We propose a new default contagion model, where default may originate from the performance of a specific form itself, but can also be directly in uenced by defaults of other forms. The default intensities of our model depend on smoothly varying macroeconomic variables, driven by a long range dependent process. In particular, we focus on the pricing of defaultable derivatives, whose default depends on the macroeconomic process and may be affected by the contagion effect. In our approach we are able to provide explicit formulas for prices of defaultable derivatives at any time t ∈ [0; T]: Finally we calculate some examples explicitly, where the macroeconomic factor process is given by a functional of the fractional Brownian motion with Hurst index H > 1/2.     «

We propose a new default contagion model, where default may originate from the performance of a specific form itself, but can also be directly in uenced by defaults of other forms. The default intensities of our model depend on smoothly varying macroeconomic variables, driven by a long range dependent process. In particular, we focus on the pricing of defaultable derivatives, whose default depends on the macroeconomic process and may be affected by the contagion effect. In our approach we are a...     »