A boundary crossing model of counterparty risk

This paper develops a market-implied credit score as a complement to internal and agency ratings. In its general form, the implied score is a multidimensional process whose passage through regions in space signals different credit events. The model offers analytical tractability and the flexibility to handle complex contract structures including, for example, claims with payoffs that are dependent on multiple credit events and multiple contracting parties. A numerical example on pricing Republic of Argentina bonds and credit derivatives tests the feasibility of the model. The study shows how to overcome several practical challenges of using structural models. (C) 2002 Elsevier Science B.V. All rights reserved.