Related papers: General dynamic term structures under default risk

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…

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…

The writers propose a mathematical Method for deriving risk weights which describe how a borrower's income, relative to their debt service obligations (serviceability) affects the probability of default of the loan. The Method considers the…

We investigate default-free bond markets where the standard relationship between a possibly existing bank account process and the term structure of bond prices is broken, i.e. the bank account process is not a valid num\'eraire. We argue…

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…

In this paper, we present a probabilistic adaptation of an Assume/Guarantee contract formalism. For the sake of generality, we assume that the extended state machines used in the contracts and implementations define sets of runs on a given…

In this paper we propose a new nonparametric approach to interacting failing systems (FS), that is systems whose probability of failure is not negligible in a fixed time horizon, a typical example being firms and financial bonds. The main…

In this paper, we consider a generic interest rate market in the presence of roll-over risk, which generates spreads in spot/forward term rates. We do not require classical absence of arbitrage and rely instead on a minimal market viability…

This paper proves existence of the long bond, long forward measure and long-term factorization of the stochastic discount factor (SDF) of Alvarez and Jermann (2005) and Hansen and Scheinkman (2009) in Heath-Jarrow-Morton (HJM) models in the…

There are many studies on development of models for analyzing some derivatives such as credit default swaps .

We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock written on a default-free dividend process,…

Due to the lack of reliable market information, building financial term-structures may be associated with a significant degree of uncertainty. In this paper, we propose a new term-structure interpolation method that extends classical spline…

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…

This paper introduces a short rate model in continuous time that adds one or more memory (delay) components to the Merton model (Merton 1970, 1973) or the Vasi\v{c}ek model (Vasi\v{c}ek 1977) for the short rate. The distribution of the…

Discount is the difference between the face value of a bond and its present value. I propose an arbitrage-free dynamic framework for discount models, which provides an alternative to the Heath--Jarrow--Morton framework for forward rates. I…

This paper studies the valuation of a class of default swaps with the embedded option to switch to a different premium and notional principal anytime prior to a credit event. These are early exercisable contracts that give the protection…

We set up a structural model to study credit risk for a portfolio containing several or many credit contracts. The model is based on a jump--diffusion process for the risk factors, i.e. for the company assets. We also include correlations…

A new procedure is presented for the objective comparison and evaluation of default definitions. This allows the lender to find a default threshold at which the financial loss of a loan portfolio is minimised, in accordance with Basel II.…

We present a statistical test that can be used to verify supervisory requirements concerning overlapping time windows for the long-term calibration in rating systems. In a first step, we show that the long-run default rate is approximately…

We present a class of flexible and tractable static factor models for the term structure of joint default probabilities, the factor copula models. These high-dimensional models remain parsimonious with pair-copula constructions, and nest…