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The Implementation of a Rating-Based Credit Risk Model
Year Of Publication: 2003
Month Of Publication: January
Pages: 41
Download Count: 2220
View Count: 9343
Comment Num: 0
Language: EN
Who Can Read: Free
Date: 6-12-2003
Publisher: Administrator
The credit risk model developed by Hamilton, James, and Webber introduces the firm-specific information into the rating transition process through a measure of credit quality of the underlying firm. In this paper, we present an algoithm for constructing a three-dimensional lattice to implement their model. In addition to the time space dimension, the proposed lattice has the credit quality of the underlying form and the rating class in the other two dimensions. Therefore the rating transition behaviour can be specified in one lattice framework. By considering the probabilities of default and being rerated at each node, the lattice produces a branchig process with seven branches emanating from each node. We use the proposed lattice method to examine the impact of the credit quality and the rating class on the value of a defaultable bond. After being calibrated to market spread data, the lattice is used to price credit derivatives.
Yueh, Meng-Lan Sign in to follow this author
Webber, Nick Sign in to follow this author
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