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Duffie–Singleton Model

  1. Erik Schlögl1,
  2. Lutz Schlögl2

Published Online: 15 MAY 2010

DOI: 10.1002/9780470061602.eqf10024

Encyclopedia of Quantitative Finance

Encyclopedia of Quantitative Finance

How to Cite

Schlögl, E. and Schlögl, L. 2010. Duffie–Singleton Model. Encyclopedia of Quantitative Finance. .

Author Information

  1. 1

    University of Technology, Sydney, New South Wales, Australia

  2. 2

    Nomura International Plc, London, UK

Publication History

  1. Published Online: 15 MAY 2010

Abstract

The Duffie–Singleton model is a reduced-form credit risk model in which instantaneous credit spreads can be identified with a “risk-neutral mean-loss rate due to default.” The model is driven by a set of state variables following a Markov process, and defaultable zero-coupon bond prices are exponentially affine functions of these variables. A key assumption is the modeling of recovery in default as an exogenously given fraction of the market value of the defaultable claim. Unlike other exponentially affine model specifications, the one proposed by Duffie and Singleton is sufficiently flexible to allow default intensities (and thus credit spreads) to be negatively correlated with default-free interest rates. The model is very tractable computationally and lends itself to econometric estimation or, alternatively, to calibration to observed market prices for purposes of relative valuation of credit derivatives.

Keywords:

  • credit risk;
  • credit derivatives;
  • affine models;
  • credit spreads;
  • default hazard rate;
  • reduced-form credit risk models