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Homogeneous semi-Markov reliability models for credit risk management*

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Abstract

The credit risk problem is one of the most important issues of modern financial mathematics. Fundamentally it consists in computing the default probability of a company going into debt. The problem can be studied by means of Markov transition models. The generalization of the transition models by means of homogeneous semi-Markov models is presented in this paper. The idea is to consider the credit risk problem as a reliability problem. In a semi-Markov environment it is possible to consider transition probabilities that change as a function of waiting time inside a state. The paper also shows how to apply semi-Markov reliability models in a credit risk environment. In the last section an example of the model is provided.

Mathematics Subject Classification (2000): 60K15, 60K20, 90B25, 91B28

Journal of Economic Literature Classification: G21, G33

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Authors and Affiliations

  1. Università di Roma La Sapienza,  

    Guglielmo D’Amico & Raimondo Manca

  2. JACAN, EURIA Université de Bretagne Occidentale,  

    Jacques Janssen

Authors
  1. Guglielmo D’Amico
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  2. Jacques Janssen
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  3. Raimondo Manca
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D’Amico, G., Janssen, J. & Manca, R. Homogeneous semi-Markov reliability models for credit risk management*. Decisions Econ Finan 28, 79–93 (2006). https://doi.org/10.1007/s10203-005-0055-8

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  • DOI: https://doi.org/10.1007/s10203-005-0055-8

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