Modeling default patterns of entities as a point process

Abstract

The proposed default modeling method is aimed at simulating the price of the credit derivative products by assuming that the risk of individual entities are similar at the same point in time but varies with time. This will produce a distribution of the default paths which will enable us to price the products prospectively. The currently used models for the credit derivatives try to determine the price of products by estimating the risk of the underlying individual entities separately which are assumed to be constant over time. This method suffices for determining the price in the current period but cannot predict the future price satisfactorily. Consequently, with the rising number of defaults, a need for prospective price determination has surfaced. In this project, we analyse a method which focuses on the default process and tries to simulate the price of the products by assuming that the risk of individual entities are similar at the same point in time but varies with time. This will produce a distribution of the default paths which will enable us to price the products prospectively.