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Author: Christian Gourieroux
Publisher: Montréal : HEC Montréal, Centre de recherche en e-finance
ISBN:
Category :
Languages : en
Pages : 60
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Book Description
Author: Christian Gourieroux
Publisher: Montréal : HEC Montréal, Centre de recherche en e-finance
ISBN:
Category :
Languages : en
Pages : 60
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Book Description
Author: Patrick Gagliardini
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Book Description
The aim of this paper is to extend the results of Jarrow, Yu (2001) on the spread term structures of corporate bonds. We first consider different characterisations of these term structures, when the available information corresponds to the default histories of the firms. The approach is then extended to factor models, both in a static and in a dynamic framework. We discuss in details the links between default correlation and jumps in short term spreads, and how these phenomenons depend on the available information.
Author: Antje Berndt
Publisher:
ISBN:
Category :
Languages : en
Pages : 52
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Book Description
We establish Markovian models in the Heath, Jarrow and Morton paradigm that permit an exponential affine representation of riskless and risky bond prices while offering significant flexibility in the choice of volatility structures. Estimating models in our family is typically no more difficult than estimating term structure models in the workhorse affine family. In addition to diffusive and jump-induced default correlations, default events can impact credit spreads of surviving firms. This feature allows a greater clustering of defaults. Numerical implementations highlight the importance of taking interest rate-credit spread correlations, credit spread impact factors and the full credit spread curve information into account when building a unified model framework that prices any credit derivative.
Author: Martijn Cremers
Publisher:
ISBN:
Category : Corporate bonds
Languages : en
Pages : 58
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Book Description
Prices of equity index put options contain information on the price of systematic downward jump risk. We use a structural jump-diffusion firm value model to assess the level of credit spreads that is generated by option-implied jump risk premia. In our compound option pricing model, an equity index option is an option on a portfolio of call options on the underlying firm values. We calibrate the model parameters to historical information on default risk, the equity premium and equity return distribution, and S & P 500 index option prices. Our results show that a model without jumps fails to fit the equity return distribution and option prices, and generates a low out-of-sample prediction for credit spreads. Adding jumps and jump risk premia improves the fit of the model in terms of equity and option characteristics considerably and brings predicted credit spread levels much closer to observed levels.
Author: Darrell Duffie
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
We examine the term structure of yield spreads between floating-rate and fixed-rate notes of the same credit quality and maturity. Floating-fixed spreads are theoretically characterized in some practical cases and quantified in a simple model in terms of maturity, credit quality, yield volatility, yield-spread volatility, correlation between changes in yield spreads and default-free yields, and other determining variables. We show that if the issuer's default risk is risk-neutrally independent of interest rates, the sign of floating-fixed spreads is determined by the term structure of the risk-free forward rate.
Author: Andriy Demchuk
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
We build a structural two-factor model of default where the stock market index is one of the stochastic factors. We allow the firm to adjust its leverage ratio in response to changes the business climate, for which the past performance of the stock market index acts as a proxy. We assume that the firm's log-leverage ratio follows a mean-reverting process and that the past performance of the stock index negatively affects the firm's target leverage ratio. Our model shows that the past performance of the stock index returns and the correlation between the firm's assets and index returns have a significant impact on credit spreads. Hence, our model can explain why credit spreads may be different within the same credit-rating groups and why spreads are lower during economic expansions and higher during recessions. We also show that our model may explain actual yield spreads better than other well known structural credit risk models.
Author: Raquel M. Gaspar
Publisher:
ISBN:
Category :
Languages : en
Pages : 44
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Book Description
There has been increasing support in the empirical literature that both the probability of default (PD) and the loss given default (LGD) are correlated and driven by macroeconomic variables. Paradoxically, there has been very little effort from the theoretical literature to develop credit risk models that would include this possibility.The goals of this paper are: first, to develop the theoretical reduced-form framework needed to handle stochastic correlation of recovery and intensity, proposing a new class of models; second, to understand under what conditions would our class of models reflect empirically observed features and, finally, to use concrete model from our class to study the impact of this correlation in credit risk term structures.We show that, in our class of models, it is possible to model directly empirically observed features. For instance, we can define default intensity and losses given default to be higher during economic depression periods - the well-know credit risk business cycle effect. Using the concrete model we show that in reduced-form models different assumptions - concerning default intensities, distribution of losses given default, and specifically their correlation - have a significant impact on the shape of credit spread term structures, and consequently on pricing of credit products as well as credit risk assessment in general.Finally, we propose a way to calibrate this class of models to market data, and illustrate the technique using our concrete example using US market data on corporate yields.
Author:
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Author: Philipp Schönbucher
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
In this paper we present a tree model for defaultable bond prices which can be used for the pricing of credit derivatives. The model is based upon the two-factor Hull-White (1994) model for default-free interest rates, where one of the factors is taken to be the credit spread of the defaultable bond prices. As opposed to the tree model of Jarrow and Turnbull (1992), the dynamics of default-free interest rates and credit spreads in this model can have any desired degree of correlation, and the model can be fitted to any given term structures of default-free and defaultable bond prices, and to the term structures of the respective volatilities. Furthermore the model can accommodate several alternative models of default recovery, including the fractional recovery model of Duffie and Singleton (1994) and recovery in terms of equivalent default-free bonds (see e.g. Lando (1998)). Although based on a Gaussian setup, the approach can easily be extended to non-Gaussian processes that avoid negative interest-rates or credit spreads.
Author: Christian Bluhm
Publisher: CRC Press
ISBN: 1584889934
Category : Business & Economics
Languages : en
Pages : 386
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Book Description
Contains Nearly 100 Pages of New MaterialThe recent financial crisis has shown that credit risk in particular and finance in general remain important fields for the application of mathematical concepts to real-life situations. While continuing to focus on common mathematical approaches to model credit portfolios, Introduction to Credit Risk Modelin
