Loan Guarantee Portfolios and Joint Loan Guarantees with Stochastic Interest Rates

Abstract

Most papers studying loan guarantee are under a one-borrower and one-guarantor framework. This study uses the option approach to construct models in which loan guarantees are analyzed under a multiple-borrower and one-guarantor framework and under a one-borrower and multiple-guarantor structure with stochastic interest rates. We carry out simulations to investigate how the important parameters of borrowers and guarantors affect the values and default probability of loan guarantees. Our results show that the correlation parameters play a critical role in determining the premiums of loan guarantee portfolios and joint loan guarantees.