Credit risk, default probability estimation, credit risk pricing models, single-name credit derivatives, securitization and basket credit derivatives, credit default swaps (CDS), credit-linked notes, basket default swaps, collateralized debt obligations (CDOs), stylized CDOs, hazard rates, doubly stochastic random times, physical and risk-neutral probability measure, market completeness, martingale modelling, actuarial approach to credit risk pricing, pricing with doubly stochastic default times, recovery payments, recovery of Treasury, recovery of face value, recovery of market value, affine models, Cox-Ingersoll-Ross square-root diffusion model, jump diffusion model, conditionally independent defaults, default correlation, first-to-default swaps, copula models, default contagion, interacting intensities
Reading Abstract:
From the Authors - In this chapter we study credit risk models in continuous time and consider the pricing of credit derivatives in the framework of reduced-form models. Reduced-form models are popular in practice, since they lead to tractable formulas explaining the price of credit-risky securities in terms of economic covariates, which facilitates estimation. Moreover, with reduced-form models it is possible to apply the well-developed pricing machinery for default-free term structure models to the analysis of defaultable securities.
Reading Contents:
9.1 Credit Derivatives
9.1.1 Overview
9.1.2 Single-Name Credit Derivatives
9.1.3 Portfolio Credit Derivatives
9.2 Mathematical Tools
9.2.1 Random Times and Hazard Rates
9.2.2 Modelling Additional Information
9.2.3 Doubly Stochastic Random Times
9.3 Financial and Actuarial Pricing of Credit Risk
9.3.1 Physical and Risk-Neutral Probability Measure
9.3.2 Risk-Neutral Pricing and Market Completeness
9.3.3 Martingale Modelling
9.3.4 The Actuarial Approach to Credit Risk Pricing
9.4 Pricing with Doubly Stochastic Default Times
9.4.1 Recovery Payments of Corporate Bonds
9.4.2 The Model
9.4.3 Pricing Formulas
9.4.4 Applications
9.5 Affine Models
9.5.1 Basic Results
9.5.2 The CIR Square-Root Diffusion
9.5.3 Extensions
9.6 Conditionally Independent Defaults
9.6.1 Reduced-Form Models for Portfolio Credit Risk
9.6.2 Conditionally Independent Default Times
9.6.3 Examples and Applications
9.7 Copula Models
9.7.1 Definition and General Properties
9.7.2 Factor Copula Models
9.8 Default Contagion in Reduced-Form Models
9.8.1 Default Contagion and Default Dependence
9.8.2 Information-Based Default Contagion
9.8.3 Interacting Intensities
Buy the Book:
If you are interested in purchasing the book,
please click here.
Book Review:
*** From the publisher ***
The implementation of sound quantitative risk models is a vital concern for all financial institutions, and this trend has accelerated in recent years with regulatory processes such as Basel II. This book provides a comprehensive treatment of the theoretical concepts and modelling techniques of quantitative risk management and equips readers--whether financial risk analysts, actuaries, regulators, or students of quantitative finance--with practical tools to solve real-world problems. The authors cover methods for market, credit, and operational risk modelling; place standard industry approaches on a more formal footing; and describe recent developments that go beyond, and address main deficiencies of, current practice.
The book`s methodology draws on diverse quantitative disciplines, from mathematical finance through statistics and econometrics to actuarial mathematics. Main concepts discussed include loss distributions, risk measures, and risk aggregation and allocation principles. A main theme is the need to satisfactorily address extreme outcomes and the dependence of key risk drivers. The techniques required derive from multivariate statistical analysis, financial time series modelling, copulas, and extreme value theory. A more technical chapter addresses credit derivatives. Based on courses taught to masters students and professionals, this book is a unique and fundamental reference that is set to become a standard in the field.
