A note on the calculation of default probabilities in "Structural credit risk modeling with Hawkes jump-diffusion processes"

Authors

Puneet Pasricha, University of WollongongFollow
Xiaoping Lu, University of WollongongFollow
Song-Ping Zhu, University of WollongongFollow

RIS ID

143699

Publication Details

Pasricha, P., Lu, X. & Zhu, S. (2020). A note on the calculation of default probabilities in "Structural credit risk modeling with Hawkes jump-diffusion processes". Journal of Computational and Applied Mathematics, 381

Abstract

2020 Elsevier B.V. Ma and Xu (2016) proposed a Hawkes jump-diffusion model for the firm's value to describe the unexpectedness of default and default clustering in the framework of Merton's structural default. However, the authors resorted to Monte-Carlo simulations for the calculation of the default probability and the default correlation, as no other solution method was available in the literature. In this note, we present a closed-form solution for the probability of default and the default correlation using the characteristic function. Our new solution can substantially improve the computational efficiency for the problem.