n this paper we analyse recovery rates on defaulted bonds using the Standard and Poors / PMD database for the years 1981-1999. Due to the specific nature of the data (observations lie within 0 and 1), we must rely on nonstandard econometric techniques. The recovery rate density is estimated...

This paper presents a utility-based approach to value the borrower optimal behavior in presence of credit risk. The paper solves for the dynamic portfolio choices of a borrower. We thereby show that the presence of debt leads to a substantial modification in the borrower's behavior across states...

We propose a simple and implementable model of credit contagion where we in-clude macro- and microstructural dependencies among the debtors within a creditportfolio. We show that, even for diversified portfolios, moderate microstructuraldependencies have already a significant impact on the tails...

Economists have forcefully argued for the introduction and use of property derivatives as a hedge against house price risk (e.g. Shiller and Weiss, 1999). The rationale for these financial instruments seems clear, as many households are heavily invested in housing and standard financial...

Credit Default Swaps (CDS) are in the process of becoming, liquid and extremelyinformative instruments of default risk. Yet, default swap market has severalnovel aspects that have not received much attention. In this paper we studyan aspect of CDS´s that relates to the prediction of financial...

In this paper, we investigate how investors who face both equity risk andcredit risk would optimally allocate their financial wealth in a dynamic continuous-time setup. We model credit risk through the defaultable zero-coupon bond and solve the dynamics of its price after pricing it. Using...

In this paper we develop a structural model of counterparty risk . In particular we provide closed form formulae for the price of risky debt and equity, which depend up on the lending/borrowing relationships in the economy. Our model applies to completely general lender/borrower relationships,...

We develop intuitive expressions for the spread between a forwardcontract and a similar futures contract taking into account the pos-sibility of counterparty default. We evaluate these expressions nu-merically and show that the forward-futures spread is significant forrealistic parameter...

Most derivative contracts are traded over-the-counter, i.e., bilaterally between two counterparties. Recently, clearing services have become available that allow to transfer over-the-counter derivatives to a central counterparty (clearing house). We develop a framework to determine the effects...

The estimation of multivariate GARCH models remains a challenging task, even in modern computer environments. This manuscript shows how Independent Component Analysiscan be used to estimate the Generalized Orthogonal GARCH model in a fraction of the time otherwise required. The proposed method...