Related papers: Structural default model with mutual obligations
There are many studies on development of models for analyzing some derivatives such as credit default swaps .
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…
Systemic risks of default contagion in the Russian interbank market are investigated. The analysis is based on considering the bow-tie structure of the weighted oriented graph describing the structure of the interbank loans. A probabilistic…
There is empirical evidence that recovery rates tend to go down just when the number of defaults goes up in economic downturns. This has to be taken into account in estimation of the capital against credit risk required by Basel II to cover…
We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are…
I develop a tractable adverse-selection model comparing secured bank loans and bonds when both pledge collateral but differ in effective liquidation efficiency. A small wedge in recovery rates generates coexistence, a sharp bank-bond…
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…
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…
Managing risk at the aggregate level is crucial for banks and financial institutions as required by the Basel III framework. In this paper, we introduce discrete time Bayesian state space models with Poisson measurements to model aggregate…
This paper builds a finite-horizon model to study the role of physical collateral in a model of strategic defaults, when the borrower can develop reputation for honesty. Asset ownership increases attractiveness of the reputational channel:…
Predicting corporate default risk has long been a crucial topic in the finance field, as bankruptcies impose enormous costs on market participants as well as the economy as a whole. This paper aims to forecast frailty correlated default…
In classical contagion models, default systems are Markovian conditionally on the observation of their stochastic environment, with interacting intensities. This necessitates that the environment evolves autonomously and is not influenced…
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 study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of…
Mortgage default rates, on the one hand, serve as a measure of economic health to support decision-making by insurance companies, and on the other hand, is a key risk factor in the asset-liability management (ALM) practice, as mortgage…
This paper considers a variant of the classical Cram\'er-Lundberg model that is particularly appropriate in the credit context, with the distinguishing feature that it corresponds to a finite number of obligors. The focus is on computing…
The classical reduced-form and filtration expansion framework in credit risk is extended to the case of multiple, non-ordered defaults, assuming that conditional densities of the default times exist. Intensities and pricing formulas are…
A simple graphical model for correlated defaults is proposed, with explicit formulas for the loss distribution. Algebraic geometry techniques are employed to show that this model is well posed for default dependence: it represents any given…
The recent "correlation breakdown" in the modeling of credit default swaps, in which model correlations had to exceed 100% in order to reproduce market prices of supersenior tranches, is analyzed and argued to be a fundamental market…
The interconnectedness of financial institutions affects instability and credit crises. To quantify systemic risk we introduce here the PD model, a dynamic model that combines credit risk techniques with a contagion mechanism on the network…