In this paper we examine the problem of partially hedging a given credit risk exposure. We derive hedges which satisfy certain optimality criteria: For a given investment into the hedge they minimize the remaining risk, or vice versa. This is motivated by the fact that it is a core business of...

This paper provides a simple model of the rescheduling of debt following a sovereign default as a bond exchange.

Modeling defaults is critical to risk management as well as pricing debt portfolios and portfolio derivatives. In the recent financial crisis, multi-billion-dollar losses resulted from correlated defaults that were improperly modeled. This paper proposes statistical approximations which are more...

Modeling defaults is critical to risk management as well as pricing debt portfolios and portfolio derivatives. In the recent financial crisis, multi-billion-dollar losses resulted from correlated defaults that were improperly modeled. This paper proposes statistical approximations which are more...

Following the reduced-form models of Duffee (1999) and Jarrow, Lando and Yu (2003), this study investigates the risk diversification issue of corporate bond portfolios. Considering especially long run market behavior, our empirical decomposition of corporate bond yield spreads indicates that the...

Following the method of Pesaran, Shin and Smith (1999), this study extends the results of Sun, Lin and Nieh (2007) to investigate the risk diversification issue of individual corporate bonds in portfolios. This is one of the few studies on the decomposition of individual corporate yield spreads....

Recent work has suggested that strategic underperformance of debt-service obligations by equity holders can resolve the gap between observed yield spreads and those generated by Merton (1974)-style models.(...)

This paper develops a default-risky bond pricing model, which assumes that the default intensity is driven by a Markov chain and which accounts for default and liquidity risk. A representation of the bond price dynamics, which separates three different types of risk, was obtained. Introducing...

In this paper, we extend the earlier results of Jeanblanc and Valchev (2003) in the single name case to the case of multiple defaults of the issuers in a concentrated industry or homo- geneous bond market. We provide solutions for the pairwise default correlations and credit spreads in an...

This analysis reveals the restricted scope of approaches which utilise arbitrage based arguments toprice contingent claims whose payoffs are determined by the outcome of non-zero-sum valuationgames between financial market participants. Many examples of such model formulations can befound, for...