Credit Risk Pricing Models

Credit Risk Pricing Models - now in its second edition - gives a deep insight into the latest basic and advanced credit risk modelling techniques covering not only the standard structural, reduced form and hybrid approaches but also showing how these methods can be applied to practice. The text covers a broad range of financial instruments, including all kinds of defaultable fixed and floating rate debt, credit derivatives and collateralised debt obligations.This volume will be a valuable source for the financial community involved in pricing credit linked financial instruments. In addition, the book can be used by students and academics for a comprehensive overview of the most important credit risk modelling issues.

Contenu

1. Introduction.- 1.1 Motivation.- 1.2 Objectives, Structure, and Summary.- 2. Modeling Credit Risk Factors.- 2.1 Introduction.- 2.2 Definition and Elements of Credit Risk.- 2.3 Modeling Transition and Default Probabilities.- 2.3.1 The Historical Method.- 2.3.2 Excursus: Some Fundamental Mathematics.- 2.3.3 The Asset Based Method.- 2.3.4 The Intensity Based Method.- 2.3.5 Adjusted Default Probabilities.- 2.4 Modeling Recovery Rates.- 2.4.1 Definition of Recovery Rates.- 2.4.2 The Impact of Seniority.- 2.4.3 The Impact of the Industry.- 2.4.4 The Impact of the Business Cycle.- 2.4.5 LossCalcTM: Moody's Model for Predicting Recovery Rates.- 3. Pricing Corporate and Sovereign Bonds.- 3.1 Introduction.- 3.1.1 Defaultable Bond Markets.- 3.1.2 Pricing Defaultable Bonds.- 3.2 Asset Based Models.- 3.2.1 Merton's Approach and Extensions.- 3.2.2 First Passage Time Models.- 3.3 Intensity Based Models.- 3.3.1 Short Rate Type Model.- 4. Correlated Defaults.- 4.1 Introduction.- 4.2 Correlated Asset Values.- 4.3 Correlated Default Intensities.- 4.4 Correlation and Copula Functions.- 5. Credit Derivatives.- 5.1 Introduction to Credit Derivatives.- 5.2 Technical Definitions.- 5.3 Single Counterparty Credit Derivatives.- 5.3.1 Credit Options.- 5.3.2 Credit Spread Products.- 5.3.3 Credit Default Products.- 5.3.4 Par and Market Asset Swaps.- 5.3.5 Other Credit Derivatives.- 5.4 Multi Counterparty Credit Derivatives.- 5.4.1 Index Swaps.- 5.4.2 Basket Default Swaps.- 5.4.3 Collateralized Debt Obligations (CDOs).- 6. A Three-Factor Defaultable Term Structure Model.- 6.1 Introduction.- 6.1.1 A New Model For Pricing Default able Bonds.- 6.2 The Three-Factor Model.- 6.2.1 The Basic Setup.- 6.2.2 Valuation Formulas For Contingent Claims.- 6.3 The Pricing of Defaultable Fixed and Floating Rate Debt.- 6.3.1 Introduction.- 6.3.2 Defaultable Discount Bonds.- 6.3.3 Defaultable (Non-Callable) Fixed Rate Debt.- 6.3.4 Defaultable Callable Fixed Rate Debt.- 6.3.5 Building a Theoretical Framework for Pricing One-Party Defaultable Interest Rate Derivatives.- 6.3.6 Defaultable Floating Rate Debt.- 6.3.7 Defaultable Interest Rate Swaps.- 6.4 The Pricing of Credit Derivatives.- 6.4.1 Some Pricing Issues.- 6.4.2 Credit Options.- 6.4.3 Credit Spread Options.- 6.4.4 Default Swaps and Default Options.- 6.5 A Discrete-Time Version of the Three-Factor Model.- 6.5.1 Introduction.- 6.5.2 Constructing the Lattice.- 6.5.3 General Interest Rate Dynamics.- 6.6 Fitting the Model to Market Data.- 6.6.1 Introduction.- 6.6.2 Method of Least Squared Minimization.- 6.6.3 The Kalman Filtering Methodology.- 6.7 Portfolio Optimization under Credit Risk.- 6.7.1 Introduction.- 6.7.2 Optimization.- 6.7.3 Case Study: Optimizing a Sovereign Bond Portfolio.- A. Some Definitions of S&P.- A.1 Definition of Credit Ratings.- A.1.1 Issue Credit Ratings.- A.1.2 Issuer Credit Ratings.- A.2 Definition of Default.- A.2.1 S&P's definition of corporate default.- A.2.2 S&P's definition of sovereign default.- B. Technical Proofs.- B.1 Proof of Lemma 6.2.1.- B.3 Proofs of Lemma 6.3.1 and Lemma 6.4.2.- B.4 Proof of Lemma 6.4.3.- B.5 Tools for Pricing Non-Defaultable Contingent Claims.- C. Pricing of Credit Derivatives: Extensions.- List of Figures.- List of Tables.- References.