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Credit Derivatives (credit + derivative)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting66%

Selected Abstracts

AN EXACT FORMULA FOR DEFAULT SWAPTIONS' PRICING IN THE SSRJD STOCHASTIC INTENSITY MODEL

MATHEMATICAL FINANCE, Issue 3 2010
Damiano Brigo
We develop and test a fast and accurate semi-analytical formula for single-name default swaptions in the context of a shifted square root jump diffusion (SSRJD) default intensity model. The model can be calibrated to the CDS term structure and a few default swaptions, to price and hedge other credit derivatives consistently. We show with numerical experiments that the model implies plausible volatility smiles. [source]

Multiple Ratings Model of Defaultable Term Structure

MATHEMATICAL FINANCE, Issue 2 2000
Tomasz R. Bielecki
A new approach to modeling credit risk, to valuation of defaultable debt and to pricing of credit derivatives is developed. Our approach, based on the Heath, Jarrow, and Morton (1992) methodology, uses the available information about the credit spreads combined with the available information about the recovery rates to model the intensities of credit migrations between various credit ratings classes. This results in a conditionally Markovian model of credit risk. We then combine our model of credit risk with a model of interest rate risk in order to derive an arbitrage-free model of defaultable bonds. As expected, the market price processes of interest rate risk and credit risk provide a natural connection between the actual and the martingale probabilities. [source]

Valuing credit derivatives using Gaussian quadrature: A stochastic volatility framework

THE JOURNAL OF FUTURES MARKETS, Issue 1 2004
Nabil Tahani
This article proposes semi-closed-form solutions to value derivatives on mean reverting assets. A very general mean reverting process for the state variable and two stochastic volatility processes, the square-root process and the Ornstein-Uhlenbeck process, are considered. For both models, semi-closed-form solutions for characteristic functions are derived and then inverted using the Gauss-Laguerre quadrature rule to recover the cumulative probabilities. As benchmarks, European call options are valued within the following frameworks: Black and Scholes (1973) (represents constant volatility and no mean reversion), Longstaff and Schwartz (1995) (represents constant volatility and mean reversion), and Heston (1993) and Zhu (2000) (represent stochastic volatility and no mean reversion). These comparisons show that numerical prices converge rapidly to the exact price. When applied to the general models proposed (represent stochastic volatility and mean reversion), the Gauss-Laguerre rule proves very efficient and very accurate. As applications, pricing formulas for credit spread options, caps, floors, and swaps are derived. It also is shown that even weak mean reversion can have a major impact on option prices. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:3,35, 2004 [source]

Copula sensitivity in collateralized debt obligations and basket default swaps

THE JOURNAL OF FUTURES MARKETS, Issue 1 2004
Davide Meneguzzo
This article empirically faces the lively debate over the choice of an appropriate copula function to be used to price and risk monitor some credit derivatives products. We consider the explicit pricing of collateralized debt obligations and basket default swaps, and empirically examine these credit derivatives within the copula framework. The results support in particular the choice of the T-copula because of its greater flexibility in capturing the tail dependence. © 2004 Wiley Periodicals, Inc. Jrl Fut Mark 24:37,70, 2004 [source]

Pricing credit derivatives under stochastic recovery in a hybrid model

APPLIED STOCHASTIC MODELS IN BUSINESS AND INDUSTRY, Issue 3 2010
Stephan Höcht
Abstract In this article, a framework for the joint modelling of default and recovery risk is presented. The model accounts for typical characteristics known from empirical studies, e.g. negative correlation between recovery-rate process and default intensity, as well as between default intensity and state of the economy, and a positive dependence of recovery rates on the economic environment. Within this framework analytically tractable pricing formulas for credit derivatives are derived. The stochastic model for the recovery process allows for the pricing of credit derivatives with payoffs that are directly linked to the recovery rate at default, e.g. recovery locks. Copyright © 2009 John Wiley & Sons, Ltd. [source]