Credit Risk Modeling with Affine Processes

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Credit Risk Modeling with Affine Processes

by Darrell Duffie of Stanford University

June 2004

Abstract: This article combines an orientation to credit risk modeling with an introduction to affine Markov processes, which are particularly useful for financial modeling. We emphasize corporate credit risk and the pricing of credit derivatives. Applications of affine processes that are mentioned include survival analysis, dynamic term-structure models, and option pricing with stochastic volatility and jumps. The default-risk applications include default correlation, particularly in first-to-default settings. The reader is assumed to have some background in financial modeling and stochastic calculus.

JEL Classification: G12, G33, C41.

Keywords: Credit risk, Affine processes, Default correlation, First to default.

Published in: Journal of Banking & Finance, Vol. 29, No. 11, (November 2005), pp. 2751-2802.

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