Fast algorithms for computing corporate default probabilities

Abstract

In this paper we consider the corporate default problem. One of the well-known approaches is to model the dynamics of the assets of the firm, and compute the probability that the assets fall below a threshold (which is related to the firm's liabilities). When modeling the asset value dynamics as a jump-diffusion process (the most realistic model), a serious computational problem arises. In this paper we propose a fast method for computing the default probability. The new method achieves significant acceleration over the available approach.