首页|Time-consistent evaluation of credit risk with contagion
Time-consistent evaluation of credit risk with contagion
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NSTL
Elsevier
A time-consistent evaluation is a dynamic pricing method according to which a risk that will be almost surely cheaper than another one at a future date should already be cheaper today. Common actuarial pricing approaches are usually not time-consistent. Pelsser and Ghalehjooghi (2016) derived time-consistent valuation principles from time inconsistent ones. The aim of this paper is twofold. Firstly, we propose a model for credit insurance portfolios taking into account the contagion risk via self-exciting jump processes. Secondly, we extend the approach of Pelsser and Ghalehjooghi to credit insurance in this framework. Starting from classical time-inconsistent actuarial pricing methods, we derive partial integro-differential equations (PIDE) for their time consistent counterparts. We discuss numerical methods for solving these PIDEs and their results. We draw two conclusions from these results. On the one hand, we show that time-consistent evaluations tend to give higher prices, compared to time-inconsistent evaluations. On the other hand, our results show that the time-consistency of evaluations allows to better take into account the risk of contagion in credit insurance, if such a risk exists. Finally, we propose a method to calibrate our model and use it in practice. (c) 2021 Elsevier B.V. All rights reserved.
NSTL
Elsevier
