This article presents a comprehensive framework for valuing financial instruments subject to credit risk and collateralization. In particular, we focus on the impact of default dependence on asset pricing, as correlated default risk is one of the most pervasive threats to financial markets. Some...

This paper analyses the risk and return of loans portfolios in a joint setting. I develop a model to obtain the distribution of loans returns. I use this model to describe the investment opportunity set of lenders using mean-variance analysis with a Value at Risk constraint. I also obtain closed...

Non-agency mortgage-backed securities (MBS) are typically priced and traded on discounted cashflow basis where a cashflow projection is made under a prepayment and default scenario and discounted with a discount margin (DM) that supposedly measures credit risk. Whilest simple and intuitive to...

Using information in US and European bank and sovereign CDS spreads we study the systematic component of banks' credit risk that stems from banks' common exposure to sovereign default risk. Based on a default intensity model, we find that sovereign default risk is a significant factor of bank...

The goal of this paper is to show that household-level financial distress (FD) varies greatly, meaning there is unequal exposure to macroeconomic risk, and that FD can increase macroeconomic vulnerability. To do this, we first establish three facts: (i) regions in the U.S. vary significantly in...

This paper is concerned with the valuation and analysis of risky debt instruments with arbitrary interest and principal payments subject to default risk. We use a discrete risk-neutral present value model with expected payments for risk-neutral investors and risk-free spot rates for the...

We analyze the dynamic interactions between credit and liquidity risk and their impact on bond prices and risk. We propose a novel way of modeling credit-liquidity interactions through mutually exciting processes and develop a corresponding Bayesian estimation procedure. Using US corporate bond...

We study market perception of sovereign credit risk in the euro area during the financial crisis. In our analysis we use a parsimonious CDS pricing model to estimate the probability of default (PD) and the loss given default (LGD) as perceived by financial markets. We find that separate...

We apply Bayesian Model Averaging and a frequentistic model space analysis to assess the pricing-determinants of credit default swaps (CDS). Our study focuses on the complete model space of plausible models covering most of the variables and specifications used elsewhere in the literature,...