The authors thank K. Hammami for his generous help with the default data, as well as HEC Montréal for its
financial support. Denault and Gauthier acknowledge the financial support of the National Science and
Engineering Research Council of Canada (NSERC).
*Correspondence author, Service de l’enseignement de la finance, HEC Montréal, 3000 Côte-Sainte-
Catherine, Montréal, Québec, Canada H3T 2A7. Tel: 1-514-340 6807, Fax: 1-514-340-5632, e-mail:
jean-guy.simonato@hec.ca
Received October 2007; Accepted February 2008
Michel Denault is an Associate Professor at the Management Science Department of HEC
Montréal, Montréal, Québec, Canada.
Geneviève Gauthier is an Associate Professor at the Management Science Department of HEC
Montréal, Montréal, Québec, Canada.
Jean-Guy Simonato is a Professor at the Finance Department of HEC Montréal, Montréal,
Québec, Canada.
The Journal of Futures Markets, Vol. 29, No. 2, 95–113 (2009)
© 2008 Wiley Periodicals, Inc.
Published online in Wiley InterScience (www.interscience.wiley.com).
DOI: 10.1002/fut.20353
ESTIMATION OF PHYSICAL
INTENSITY MODELS FOR
DEFAULT RISK
MICHEL DENAULT
GENEVIÈVE GAUTHIER
JEAN-GUY SIMONATO*
The estimation of physical intensity processes in the context of default risk is
investigated here. Using data from Moody’s Corporate Bond Default Database, a
term structure of default probabilities for different rating classes is constructed
each year from 1970 to 2001. Two specifications used for modeling the dynamics
of the (risk-neutral) intensity process in the bond-pricing literature are then
examined empirically: the Ornstein–Uhlenbeck and square-root cases. The
results reveal that the Ornstein–Uhlenbeck case is not an adequate modeling
alternative with a rejection of this specification in five out of seven credit classes
and nonsignificant mean reverting behavior for all credit classes. The square-root
96
Denault, Gauthier, and Simonato
Journal of Futures Markets DOI: 10.1002/fut
case obtains better results with four credit classes out of seven for which th