Topic
Reduced form
About: Reduced form is a research topic. Over the lifetime, 148 publications have been published within this topic receiving 3682 citations.
Papers published on a yearly basis
Papers
TL;DR: It is shown how to generalize a model of Jarrow, Lando and Turnbull (1997) to allow for stochastic transition intensities between rating categories and into default to reduce the technical issues of modeling credit risk.
Abstract: A framework is presented for modeling defaultable securities and credit derivatives which allows for dependence between market risk factors and credit risk. The framework reduces the technical issues of modeling credit risk to the same issues faced when modeling the ordinary term structure of interest rates. It is shown how to generalize a model of Jarrow, Lando and Turnbull (1997) to allow for stochastic transition intensities between rating categories and into default. This generalization can handle contracts with payments explicitly linked to ratings. It is also shown how to obtain a term structure model for all different rating categories simultaneously and how to obtain an affine-like structure. An implementation is given in a simple one factor model in which the affine structure gives closed form solutions.
1,433 citations
TL;DR: The authors decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance, and discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility.
214 citations
Posted Content•
TL;DR: The authors decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance, and discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility.
Abstract: Building on realized variance and bi-power variation measures constructed from high-frequency financial prices, we propose a simple reduced form framework for effectively incorporating intraday data into the modeling of daily return volatility. We decompose the total daily return variability into the continuous sample path variance, the variation arising from discontinuous jumps that occur during the trading day, as well as the overnight return variance. Our empirical results, based on long samples of high-frequency equity and bond futures returns, suggest that the dynamic dependencies in the daily continuous sample path variability is well described by an approximate long-memory HAR-GARCH model, while the overnight returns may be modelled by an augmented GARCH type structure. The dynamic dependencies in the non-parametrically identified significant jumps appear to be well described by the combination of an ACH model for the time-varying jump intensities coupled with a relatively simple log-linear structure for the jump sizes. Lastly, we discuss how the resulting reduced form model structure for each of the three components may be used in the construction of out-of-sample forecasts for the total return volatility.
160 citations
Posted Content•
TL;DR: In this article, an alternative approach for obtaining a reduced-form credit risk model from a structural model was proposed, where the market sees a reduction of the manager's information set plus noise.
Abstract: This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633-664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager's information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager's information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azema martingale, and we use excursion theory of Brownian motions to price risky debt.
157 citations
TL;DR: In this article, an alternative approach for obtaining a reduced-form credit risk model from a structural model is presented, where the market sees a reduction of the manager's information set plus noise, which makes default a surprise to the market.
Abstract: This paper provides an alternative approach to Duffie and Lando [Econometrica 69 (2001) 633–664] for obtaining a reduced form credit risk model from a structural model. Duffie and Lando obtain a reduced form model by constructing an economy where the market sees the manager’s information set plus noise. The noise makes default a surprise to the market. In contrast, we obtain a reduced form model by constructing an economy where the market sees a reduction of the manager’s information set. The reduced information makes default a surprise to the market. We provide an explicit formula for the default intensity based on an Azema martingale, and we use excursion theory of Brownian motions to price risky debt.
132 citations
Related Topics (5)
Performance Metrics
| Year | Papers |
|---|---|
| 2022 | 1 |
| 2021 | 3 |
| 2020 | 2 |
| 2019 | 2 |
| 2018 | 3 |
| 2017 | 5 |