Related papers: Bivariate Semi-Markov Process for Counterparty Cre…
We develop a model for credit rating migration that accounts for the impact of economic state fluctuations on default probabilities. The joint process for the economic state and the rating is modelled as a time-homogeneous Markov chain.…
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…
We present two methodologies on the estimation of rating transition probabilities within Markov and non-Markov frameworks. We first estimate a continuous-time Markov chain using discrete (missing) data and derive a simpler expression for…
We propose a Markov chain model for credit rating changes. We do not use any distributional assumptions on the asset values of the rated companies but directly model the rating transitions process. The parameters of the model are estimated…
The valuation of counterparty risk for single name credit derivatives requires the computa- tion of joint distributions of default times of two default-prone entities. For a Merton-type model, we derive some formulas for these joint…
There exists a range of different models for estimating and simulating credit risk transitions to optimally manage credit risk portfolios and products. In this chapter we present a Coupled Markov Chain approach to model rating transitions…
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…
The credit crisis and the ongoing European sovereign debt crisis have highlighted the native form of credit risk, namely the counterparty risk. The related Credit Valuation Adjustment, (CVA), Debt Valuation Adjustment (DVA), Liquidity…
To quantify the changes in the credit rating of a bond is an important mathematical problem for the credit rating industry. To think of the credit rating as the state a Markov chain is an interesting proposal leading to challenges in…
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…
A multi-dimensional extension of the structural default model with firms' values driven by diffusion processes with Marshall-Olkin-inspired correlation structure is presented. Semi-analytical methods for solving the forward calibration…
Markov switching models are often used to analyze financial returns because of their ability to capture frequently observed stylized facts. In this paper we consider a multivariate Student-t version of the model as a viable alternative to…
We study the problem of finding the worst-case joint distribution of a set of risk factors given prescribed multivariate marginals and a nonlinear loss function. We show that when the risk measure is CVaR, and the distributions are…
We develop a multi-curve term structure setup in which the modelling ingredients are expressed by rational functionals of Markov processes. We calibrate to LIBOR swaptions data and show that a rational two-factor lognormal multi-curve model…
We depart from the usual methods for pricing contracts with the counterparty credit risk found in most of the existing literature. In effect, typically, these models do not account for either systemic effects or at-first-default contagion…
We develop an approach to time-consistent risk evaluation of continuous-time processes in Markov systems. Our analysis is based on dual representation of coherent risk measures, differentiability concepts for multivalued mappings, and a…
We introduce a dynamic model of the default waterfall of derivatives CCPs and propose a risk sensitive method for sizing the initial margin (IM), and the default fund (DF) and its allocation among clearing members. Using a Markovian…
A Markov-chain model is developed for the purpose estimation of the cure rate of non-performing loans. The technique is performed collectively, on portfolios and it can be applicable in the process of calculation of credit impairment. It is…
In this paper, we model financial markets with semi-Markov volatilities and price covarinace and correlation swaps for this markets. Numerical evaluations of vari- nace, volatility, covarinace and correlations swaps with semi-Markov…
We obtain an explicit formula for the bilateral counterparty valuation adjustment of a credit default swaps portfolio referencing an asymptotically large number of entities. We perform the analysis under a doubly stochastic intensity…