Related papers: Credit Risk, Market Sentiment and Randomly-Timed D…
A new framework for asset price dynamics is introduced in which the concept of noisy information about future cash flows is used to derive the price processes. In this framework an asset is defined by its cash-flow structure. Each cash flow…
We consider the optimal investment problem when the traded asset may default, causing a jump in its price. For an investor with constant absolute risk aversion, we compute indifference prices for defaultable bonds, as well as a price for…
We compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox and find that corporations default as if via diffusive dynamics. The model, based…
A dynamical model is introduced for the formation of a bullish or bearish trends driving an asset price in a given market. Initially, each agent decides to buy or sell according to its personal opinion, which results from the combination of…
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…
The impact of a stress scenario of default events on the loss distribution of a credit portfolio can be assessed by determining the loss distribution conditional on these events. While it is conceptually easy to estimate loss distributions…
The utility-based pricing of defaultable bonds in the case of stochastic intensity models of default risk is discussed. The Hamilton-Jacobi- Bellman (HJB) equations for the value functions is derived. A finite difference method is used to…
We consider an approach to credit risk in which the information about the time of bankruptcy is modelled using a Brownian bridge that starts at zero and is conditioned to equal zero when the default occurs. This raises the question whether…
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 paper analyzes the mathematics of the relationship between the default risk and yield-to-maturity of a coupon bond. It is shown that the yield-to-maturity is driven not only by the default probability and recovery rate of the bond but…
The risk of a credit portfolio depends crucially on correlations between the probability of default (PD) in different economic sectors. Often, PD correlations have to be estimated from relatively short time series of default rates, and the…
The notion of a credit spread curve is fundamental in fixed income investing, but in practice it is not `given' and needs to be constructed from bond prices either for a particular issuer, or for a sector rating-by-rating. Rather than…
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…
In this short paper, we study the simulation of a large system of stochastic processes subject to a common driving noise and fast mean-reverting stochastic volatilities. This model may be used to describe the firm values of a large pool of…
We extend the information-based asset-pricing framework by Brody, Hughston \& Macrina to incorporate a stochastic bankruptcy time for the writer of the asset. Our model introduces a non-defaultable cash flow $Z_T$ to be made at time $T$,…
This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized…
We study multiple defaults where the global market information is modelled as progressive enlargement of filtrations. We shall provide a general pricing formula by establishing a relationship between the enlarged filtration and the…
If the probability of default parameters (PDs) fed as input into a credit portfolio model are estimated as through-the-cycle (TTC) PDs stressed market conditions have little impact on the results of the capital calculations conducted with…
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…
This work has the objective of estimating default probabilities and correlations of credit portfolios given default rate information through a Bayesian framework using Stan. We use Vasicek's single factor credit model to establish the…