Related papers: Mortgage Contracts and Underwater Default
In credit risk literature, the existence of an equivalent martingale measure is stipulated as one of the main assumptions in the hazard process model. Here we show by construction the existence of a measure that turns the discounted stock…
The rapidly growing hedge fund industry has provided individual and institutional investors with new investment vehicles and styles of management. It has also brought forward a new form of performance contract: hedge fund managers receive…
We study a continuous time contracting model in which a principal hires a risk averse agent to manage a project over a finite horizon and provides sequential payments whose timing is endogenously determined. The resulting nonzero-sum…
We propose a semi-structured discrete-time multi-state model to analyse mortgage delinquency transitions. This model combines an easy-to-understand structured additive predictor, which includes linear effects and smooth functions of time…
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…
We present the method of moments approach to pricing barrier-type options when the underlying is modelled by a general class of jump diffusions. By general principles the option prices are linked to certain infinite dimensional linear…
We analyze the practical consequences of the bilateral counterparty risk adjustment. We point out that past literature assumes that, at the moment of the first default, a risk-free closeout amount will be used. We argue that the legal…
A principal with cheap capital optimally forces her counterparty to borrow at above-market rates. The reason: the form of finance is a screening device. Advances provide liquidity but pool types; contingent transfers separate types, but,…
We develop a model to predict consumer default based on deep learning. We show that the model consistently outperforms standard credit scoring models, even though it uses the same data. Our model is interpretable and is able to provide a…
We consider a financial market in which the risk-free rate of interest is modeled as a Markov diffusion. We suppose that home prices are set by a representative home-buyer, who can afford to pay only a fixed cash-flow per unit time for…
This paper studies game-type credit default swaps that allow the protection buyer and seller to raise or reduce their respective positions once prior to default. This leads to the study of an optimal stopping game subject to early default…
In this paper we show how the relaxation techniques can be used to establish the existence of an optimal contract in presence of information asymmetry. The method we illustrate was initially motivated by the problem of designing optimal…
Federal student loans are fixed-rate debt contracts with three main special features: (i) borrowers can use income-driven schemes to make payments proportional to their income above subsistence, (ii) after several years of good standing,…
Advertising options have been recently studied as a special type of guaranteed contracts in online advertising, which are an alternative sales mechanism to real-time auctions. An advertising option is a contract which gives its buyer a…
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…
This paper develops a continuous-time filtering framework for estimating a hazard rate subject to an unobservable change-point. This framework naturally arises in both financial and insurance applications, where the default intensity of a…
This paper presents a convenient framework for modeling default process and pricing derivative securities involving credit risk. The framework provides an integrated view of credit valuation adjustment by linking distance-to-default,…
Contracts and contract monitoring are a powerful mechanism for specifying properties and guaranteeing them at run time. However, run time monitoring of contracts imposes a significant overhead. The execution time is impacted by the…
This article presents a new model for valuing a credit default swap (CDS) contract that is affected by multiple credit risks of the buyer, seller and reference entity. We show that default dependency has a significant impact on asset…
In this note, we develop stock option price approximations for a model which takes both the risk o default and the stochastic volatility into account. We also let the intensity of defaults be influenced by the volatility. We show that it…