Related papers: Correlation breakdown, copula credit default model…
We develop robust pricing and hedging of a weighted variance swap when market prices for a finite number of co--maturing put options are given. We assume the given prices do not admit arbitrage and deduce no-arbitrage bounds on the weighted…
We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted…
We introduce the general arbitrage-free valuation framework for counterparty risk adjustments in presence of bilateral default risk, including default of the investor. We illustrate the symmetry in the valuation and show that the adjustment…
We consider the problem of concurrent portfolio losses in two non-overlapping credit portfolios. In order to explore the full statistical dependence structure of such portfolio losses, we estimate their empirical pairwise copulas. Instead…
We propose a new model of the liquidity driven banking system focusing on overnight interbank loans. This significant branch of the interbank market is commonly neglected in the banking system modeling and systemic risk analysis. We…
This paper presents a convenient framework for modeling default process and pricing derivative securities involving credit risk. The framework provides an integrated view of credit valuation adjustment by linking distance-to-default,…
Much research in systemic risk is focused on default contagion. While this demands an understanding of valuation, fewer articles specifically deal with the existence, the uniqueness, and the computation of equilibrium prices in structural…
The classical discrete time model of proportional transaction costs relies on the assumption that a feasible portfolio process has solvent increments at each step. We extend this setting in two directions, allowing for convex transaction…
A model is developed to assess the profitability of loans or mortgages with a specified repayment schedule. Financial institutions face two competing risks: default and prepayment, both influenced by the stochastic evolution of credit…
We propose a novel credit default model that takes into account the impact of macroeconomic information and contagion effect on the defaults of obligors. We use a set-valued Markov chain to model the default process, which is the set of all…
Foreign exchange rates movements exhibit significant cross-correlations even on very short time-scales. The effect of these statistical relationships become evident during extreme market events, such as flash crashes.In this scenario, an…
Financial networks are characterized by complex structures of mutual obligations. These obligations are fulfilled entirely or in part (when defaults occur) via a mechanism called clearing, which determines a set of payments that settle the…
While defaults are rare events, losses can be substantial even for credit portfolios with a large number of contracts. Therefore, not only a good evaluation of the probability of default is crucial, but also the severity of losses needs to…
We prove the superhedging duality for a discrete-time financial market with proportional transaction costs under model uncertainty. Frictions are modeled through solvency cones as in the original model of [Kabanov, Y., Hedging and…
The issue of model risk in default modeling has been known since inception of the Academic literature in the field. However, a rigorous treatment requires a description of all the possible models, and a measure of the distance between a…
Evaluation of default correlation is an important task in credit risk analysis. In many practical situations, it concerns the joint defaults of several correlated firms, the task that is reducible to a first passage time (FPT) problem. This…
We describe a way to complete a correlation matrix that is not fully specified. Such matrices often arise in financial applications when the number of stochastic variables becomes large or when several smaller models are combined in a…
The credit crisis roiling the world's financial markets will likely take years and entire careers to fully understand and analyze. A short empirical investigation of the current trends, however, demonstrates that the losses in certain…
Credit scores are critical for allocating consumer debt in the United States, yet little evidence is available on their performance. We benchmark a widely used credit score against a machine learning model of consumer default and find…
This paper considers mutual obligations in the interconnected bank system and analyzes their influence on joint and marginal survival probabilities as well as CDS and FTD prices for the individual banks. To make the role of mutual…