We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear-rational in the factors. The price of a CDS option can be uniformly approximated by...

The theory of pricing to acceptability developed for incomplete markets by Cherny and Madan (2009b) is applied to marking ones own default risk. It is observed in agreement with Heckman (2004), that assets and liabilities are not to be priced under fair value accounting principles at the same...

In the first part we consider a dynamical model for the number of defaults of a pool of names. The model is based on the notion of generalized Poisson process, allowing for more than one default in small time intervals, contrary to many alternative approaches to loss modeling. We illustrate how...

In this paper we consider the valuation of total return swaps (TRS). Since a total return swap is a collateralized derivative referencing the value process of an uncollateralized asset it is in general not possible that both counter parties agree on a unique value. Consequently it is not...

Modelling portfolio credit risk is one of the crucial challenges faced by financial services industry in the last few years. We propose the valuation model of collateralized debt obligations (CDO) based on copula functions with up to three parameters, with default intensities estimated from...

As observed in the financial crisis, CDS spreads tend to increase simutaneously as a reaction to common shocks. Focusing on the spillover effects triggered by extreme events, we propose a credit risk analysis tool by applying credit default swap spread returns to the concept of 4CoVaR suggested...

The new structural model of credit risk based on a normal firm value diffusion process can infer the firm value volatility from bank credit spreads that closely agreeing with the empirically estimated firm value volatility. We use the spread-implied firm value volatility as the model volatility...

The financial crisis has raised concerns throughout the industry on the possibility that hedging credit valuation adjustment (CVA) might become increasingly difficult should the long-standing correlation between singlename and index CDS products break down. So, we provide an estimation of the...

The centralized market for the settlement of credit default swaps (CDS), which governs more than $10 trillion's worth of outstanding CDS contracts, has been criticized for mispricing the defaulted bonds that underlie the contracts. I take a mechanism design approach to the settlement of CDS...

We propose an equilibrium model for defaultable bonds that are subject to contagion risk. Contagion arises because agents with "fragile beliefs"' are uncertain about the underlying economic state and its probability. Estimation on sovereign European credit default swaps (CDS) data shows that...