A Stochastic Model for Credit Spreads
Document ID: 2003-82 (previously 2003/001)
Published on: 1st April 2003
The JLT credit model describes credit spreads in terms of a historical transition matrix a "credit risk premium" parameter, and an assumption about recovery in the event of default. One of the key assumptions is that the credit risk premium moves in a deterministic manner, but this is unrealistic. Within the B&H ESG we have implemented a 'JLT+' model in which the credit risk premium follows a stochastic procsss. This note describes this stochastic model in detail and provides example results.
