Estimation of Default Risk in CIR++ model simulation

Veneta Metodieva Markovska, Stanimir Ivanov Kabaivanov, Mariyan Nedelchev Milev

Abstract


Default risk has always been a matter of importance for financial managers and scholars. In this paper we apply an intensity-based approach for default estimation with a software simulation of the Cox-Ingersoll-Ross model. We analyze the possibilities and effects of a non-linear dependence between economic and financial state variables and the default density, as specified by the theoretical model. Then we perform a test for verifying how simulation techniques can improve the analysis of such complex relations when closed-form solutions are either not available or hard to come by.


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