On the formulation of credit barrier model using radial basis functions

Albanese et al in 2003 and Avellaneda and Zhu in 2001 develop the framework of credit barrier model. They provide special solutions to the model in case of simple stochastic structure. The technical aspect of the model remains wide open for general stochastic structure that is crucial when the model...

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Bibliographic Details
Published in:The Journal of the Operational Research Society 2014-09, Vol.65 (9), p.1437-1452
Main Authors: Tung, Humphrey K K, Wong, Michael C S
Format: Article
Language:English
Subjects:
Boundary conditions
Business and Management
Calibration
Coefficients
Credit
credit migration
Credit ratings
Experimental data
Finite difference methods
General Paper
General Papers
Kolmogorov equation
Management
Modeling
Operations research
Operations Research/Decision Theory
Parametric models
Partial differential equations
Probability
radial basis function
Stochastic models
Studies
Yield curves
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Summary:Albanese et al in 2003 and Avellaneda and Zhu in 2001 develop the framework of credit barrier model. They provide special solutions to the model in case of simple stochastic structure. The technical aspect of the model remains wide open for general stochastic structure that is crucial when the model is required to calibrate with aggregate amount of empirical data. This paper provides a technical solution to this problem with the use of radial basis functions (RBF). This paper discusses the numerical implementation of the credit barrier model using the RBF method. It also demonstrates that the RBF method is numerically tractable in this problem and allows in the model richer stochastic structure capable of capturing relevant market information.
ISSN:0160-5682
1476-9360
DOI:10.1057/jors.2013.93