In this paper we apply a copula function pricing technique to the evaluation of credit derivatives, namely a vulnerable default put option and a credit switch. Also in this case, copulas enable to separate the specification of marginal default probabilities from their dependence structure. Their...

In this paper we apply a copula function pricing technique to the evaluation of vulnerable options, i.e. options with counterpart risk. Using copulas enables to separate the specification of marginal distributions and the dependence structure of the events of exercise of the option and default...

In this paper we suggest the adoption of copula functions in order to price multivariate contingent claims. Copulas enable us to imbed the marginal distributions extracted from vertical spreads in the options markets in a multivariate pricing kernel. We prove that such kernel is a copula...

The latest tools and techniques for pricing and risk managementThis book introduces readers to the use of copula functions to represent the dynamics of financial assets and risk factors, integrated temporal and cross-section applications. The first part of the book will briefly introduce the...

This paper uses copula functions in order to evaluate tail probabilities and market risk trade-offs at a given confidence level, dropping the joint normality assumption on returns. Copulas enable to represent distribution functions separating the marginal distributions from the association...

We provide a model able to compute a threshold level for the public debt/GDP ratio, such that a country can be rescued by an official lender (e.g. ESM or IMF). The critical level is defined as the maximum level of debt/GDP, such that it is still possible to put the debt/GDP ratio on a...

We discuss the economic model and the econometric properties of the Convolution Autoregressive Process of order 1 (C-AR(1)), with focus on the simplest gaussian case. This is a first order autoregressive process in which the error terms are dependent on the lagged value of the process. We show...

We provide a structural model of sovereign credit risk, where the risk premium paid by the government is linked to some key economic variables of a country: public debt and deficit, GDP growth. This model is then applied to measure the impact of splitting the public debt into a senior and a...