Thursday, July 11, 2019 2:00 PM
Harvey Stein (Bloomberg NY)

Credit risk models largely bifurcate into two classes — the structural models and the reduced form models. Attempts have been made to reconcile the two approaches by adjusting filtrations to restrict information (Cetin, Jarrow, Protter, and Yldrm, Jarrow and Protter, and Giesecke) but they are technically complicated and tend to approach filtration modification in an ad-hock fashion. Here we propose a reconciliation inspired by actuarial science’s approach to survival analysis. Extending the work of Chen, we model the survival and hazard rate curves themselves as a stochastic processes. This puts default models in a form resembling the HJM framework for interest rates (Heath, Jarrow, and Morton), and yields a unified framework for default modeling. Joint work with Albert Cohen & Nick Costanzino