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An analytically tractable time-changed jump-diffusion default intensity model

Abstract: We present a stochastic default intensity model where the intensity follows a tractable jump-diffusion process obtained by applying a deterministic change of time to a non mean-reverting square root jump-diffusion process. The model generates higher implied volatilities for default swaptions than mean-reverting versions, consistent with volatility levels observed on the market.

Published on 5th September 2011
Authors Naoufel El-Bachir, Damiano Brigo
Series Reference 2008-06