A closed-form extension to the Black-Cox model

Alfonsi Aurélien (1) , Jérôme Lelong (2)

1 CERMICS - Centre d'Enseignement et de Recherche en Mathématiques et Calcul Scientifique
2 UMA - Unité de Mathématiques Appliquées

In the Black-Cox model, a firm defaults when its value hits an exponential barrier. Here, we propose an hybrid model that generalizes this framework. The default intensity can take two different values and switches when the firm value crosses a barrier. Of course, the intensity level is higher below the barrier. We get an analytic formula for the Laplace transform of the default time and present numerical methods to numerically recover its distribution. Last, we explain how this model can be calibrated to Credit Default Swap prices and show its tractability on different kind of data.

Domaines: Probabilités [math.PR]; Finance quantitative [q-fin.CP]

Alfonsi Aurélien, Jérôme Lelong. A closed-form extension to the Black-Cox model. 2009. ⟨hal-00414280v1⟩