Related papers: A Guide to Modeling Credit Term Structures
We propose a model which can be jointly calibrated to the corporate bond term structure and equity option volatility surface of the same company. Our purpose is to obtain explicit bond and equity option pricing formulas that can be…
The proposed model is aimed to reveal important patterns in the behavior of a simplified financial system. The patterns could be detected as regular cycles consisting of debt bubbles and crises. Financial cycles have a well defined…
Credit risk assessment is a crucial aspect of financial decision-making, enabling institutions to predict the likelihood of default and make informed lending decisions. Two prominent methodologies in credit risk modeling are logistic…
This paper describes a flexible and tractable bottom-up dynamic correlation modelling framework with a consistent stochastic recovery specification. The stochastic recovery specification only models the first two moments of the spot…
Overnight rates, such as the SOFR (Secured Overnight Financing Rate) in the US, are central to the current reform of interest rate benchmarks. A striking feature of overnight rates is the presence of jumps and spikes occurring at…
In structural credit risk models, default events and the ensuing losses are both derived from the asset values at maturity. Hence it is of utmost importance to choose a distribution for these asset values which is in accordance with…
A three-dimensional extension of the structural default model with firms' values driven by correlated diffusion processes is presented. Green's function based semi-analytical methods for solving the forward calibration problem and backward…
We explore the statistical and economic importance of restrictions on the dynamics of risk compensation from the perspective of a real-time Bayesian learner who predicts bond excess returns using dynamic term structure models (DTSMs). The…
Systemic risk is a rapidly developing area of research. Classical financial models often do not adequately reflect the phenomena of bubbles, crises, and transitions between them during credit cycles. To study very improbable events,…
A survival model is derived from the exponential function using the concept of fractional differentiation. The hazard function of the proposed model generates various shapes of curves including increasing, increasing-constant-increasing,…
We estimate generic statistical properties of a structural credit risk model by considering an ensemble of correlation matrices. This ensemble is set up by Random Matrix Theory. We demonstrate analytically that the presence of correlations…
The estimation of marginal loan write-off probabilities is a non-trivial task when modelling the loss given default (LGD) risk parameter in credit risk. We explore two types of survival models in estimating the overall write-off probability…
Recently, incomplete-market techniques have been used to develop a model applicable to credit default swaps (CDSs) with results obtained that are quite different from those obtained using the market-standard model. This article makes use of…
We explore credit risk pricing by modeling equity as a call option and debt as the difference between the firm's asset value and a put option, following the structural framework of the Merton model. Our approach proceeds in two stages:…
This paper considers general term structure models like the ones appearing in portfolio credit risk modelling or life insurance. We give a general model starting from families of forward rates driven by infinitely many Brownian motions and…
Diffusion in a linear potential in the presence of position-dependent killing is used to mimic a default process. Different assumptions regarding transport coefficients, initial conditions, and elasticity of the killing measure lead to…
Consistent Recalibration models (CRC) have been introduced to capture in necessary generality the dynamic features of term structures of derivatives' prices. Several approaches have been suggested to tackle this problem, but all of them,…
We introduce an innovative theoretical framework to model derivative transactions between defaultable entities based on the principle of arbitrage freedom. Our framework extends the traditional formulations based on Credit and Debit…
We propose two structural models for stochastic losses given default which allow to model the credit losses of a portfolio of defaultable financial instruments. The credit losses are integrated into a structural model of default events…
This article presents a generic model for pricing financial derivatives subject to counterparty credit risk. Both unilateral and bilateral types of credit risks are considered. Our study shows that credit risk should be modeled as American…