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Dependence Modelling and Risk Analysis in a Joint Credit-Equity Framework
KTH, School of Engineering Sciences (SCI), Mathematics (Dept.), Mathematical Statistics.
2015 (English)Independent thesis Advanced level (degree of Master (Two Years)), 20 credits / 30 HE creditsStudent thesis
Abstract [en]

This thesis is set in the intersection between separate types of financial markets, with emphasis on joint risk modelling. Relying on empirical findings pointing toward the ex- istence of dependence across equity and corporate debt markets, a simulation framework intended to capture this property is developed. A few different types of models form building blocks of the framework, including stochastic processes describing the evolution of equity and credit risk factors in continuous time, as well as a credit rating based model, providing a mechanism for imposing dependent credit migrations and defaults for firms participating in the market. A flexible modelling framework results, proving capable of generating dependence of varying strength and shape, across as well as within studied markets. Particular focus is given to the way markets interact in the tails of the distributions. By means of simulation, it is highlighted that dependence as produced by the model tends to spread asymmetrically with simultaneously extreme outcomes occurring more frequently in lower than in upper tails. Attempts to fit the model to observed market data featuring historical stock index and corporate bond index values are promising as both marginal distributions and dependence connecting the investigated asset types appear largely replicable, although we conclude further validation remains.

Place, publisher, year, edition, pages
TRITA-MAT-E, 2015:20
National Category
Mathematical Analysis
URN: urn:nbn:se:kth:diva-168154OAI: diva2:816446
Subject / course
Mathematical Statistics
Educational program
Master of Science - Applied and Computational Mathematics
Available from: 2015-06-03 Created: 2015-05-27 Last updated: 2015-06-03Bibliographically approved

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