We present the non-Gaussian extension of the traditional Merton framework, which takes into account slowly relaxing fluctuations of the volatility of the firm's market value of financial assets. The minimal version of the model depends on the Tsallis entropic parameter q and the generalized...

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...

The empirical tests of traditional structural models of credit risk tend to indicate that such models have been unsuccessful in the modeling of credit spreads. To address these negative findings some authors introduce single-factor stochastic volatility specifications and/or jumps.In the yield...

We investigate the informational content of credit default swap (CDS) spreads for future volatility of (firm) assets and equity. In the cross-section, CDS spreads are significantly more informative about future asset than equity volatility. The informational content of historical and option...

We generalize the asset dynamics assumptions of Leland (1994b) and Leland and Toft (1996) to a much richer class of models. By assuming a stationary corporate debt structure with constant principal, coupon payment and average maturity through continuous retirement and refinancing as long as the...

We explore the implications of ambiguity for the pricing of credit default swaps (CDSs). A model of heterogeneous investors with independent preferences for ambiguity and risk shows that, since CDS contracts are assets in zero net supply, the net credit risk exposure of the marginal investor...

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...

The purpose of this paper is introducing rigorous methods and formulas for bilateral counterparty risk credit valuation adjustments (CVA's) on interest-rate portfolios. In doing so, we summarize the general arbitrage-free valuation framework for counterparty risk adjustments in presence of...