GOALI: Carnegie Mellon - Morgan Stanley Mathematical Finance Postdoctoral Fellow

Carnegie Mellon University, Pittsburgh PA

Investigators

Abstract

GOALI: Carnegie Mellon - Morgan Stanley Mathematical Finance Post-Doctoral Fellow The principal investigators will participate with a post-doctoral fellow on the development of models for corporate bond default. There are two general classes of such models. In one of these, the models of "structural form," default occurs when the value of a firm hits a lower barrier. These are intuitively appealing, but in their pure form they suffer from the fact that default is never a surprise. The second class of models, those of "reduced form," postulate an exogenous event which triggers default. These have an intensity of arrival of the default event, and the difficulty with these models is constructing this intensity process so that the model conforms to market data. This work will investigate the behavior of models in which the intensity process is driven by two factors, one evolving on a fast time scale and the other on a slow time scale. Such models are amenable to asymptotic analysis as the fast time scale approaches infinity. Recent years have shown that default on financial obligations is a genuine possibility, and as a result, many financial instruments which offer some form of protection against default have arisen. These instruments are a type of derivative security. Pricing these instruments and managing the risk associated with them has become a critical issue for the banks that issue and trade them. A number of mathematical models have been developed for this purpose, and each of them has certain drawbacks. Under this grant, the principal investigators and a post-doctoral fellow will develop a new class of models based on a novel approach that has proved useful in modeling other types of derivative securities.