Hybrid Equity-Credit Modelling
Résumé
We propose a study of the pitfalls of the market widely used Poisson Default model in the Equity-Credit Hybrid land and show that a slight modification of the Constant Elasticity of Variance (CEV) model can, in addition to its well-known properties, capture the default event probability. Because of a need for more freedom between the volatility level, the skewness and the risk of default, we exhibit extensions of the CEV model adding stochasticity in the volatility.