Ruediger Frey (University of Vienna)

We study Markov-modulated affine processes (abbreviated MMAPs), a class of Markov processes that are created from affine processes by allowing some of their coefficients to be a function of an exogenous Markov process. MMAPs  allow for richer models in various applications. At the same time MMAPs largely preserve the tractability of standard affine processes, as their characteristic function has a computationally convenient functional form. Moreover, we present a case study where we study various securitization products based on portfolios of European government bonds, in  a portfolio credit risk model with Markov modulated intensities. This part of the talk relates to the debate on so-called European Safe Bonds  as a tool for improving the functioning of the Euro area.

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