We show that liquidity tail risk in credit default swap (CDS) spreads is time-varying and explains variation in CDS spreads. We capture the liquidity tail risk of a CDS contract written on a firm by estimating the tail dependence, i.e., the asymptotic probability of a joint surge in the bid-ask...

There is a close link between prices of equity options and the probability of default of a firm. We show that in the presence of positive expected equity recovery, the standard methods that assume zero equity recovery at default misestimate the probability of default implicit in option prices....

Based on the works of Brockman and Turtle (2003) and Giesecke (2004), we propose in this study a hybrid barrier option model to explain observed credit spreads. It is free of problems with the structural model which underprescribed credit spreads for investment grade corporate bonds and...

This study estimates the parameters of credit derivatives, equity derivatives and structural models for bank recapitalisation in Nigeria by employing contingent convertibles (CoCos) and using the Nigeria Treasury Bill rate for 2009 as the risk-free rate, estimated recapitalisation requirements...

The one-side defaultable financial derivatives valuation problems have been studied extensively, but the valuation of bilateral derivatives with asymmetric credit qualities is still lacking convincing mechanism. This paper presents an analytical model for valuing derivatives subject to default...

We are the first to provide closed-form analytic solutions for the joint problem of mortgage refinancing and default. Our solution takes into account reduction in mortgage interest rates and the "cash-out" motive for refinancing. The model predicts how long the households are likely to wait...

We investigate default probabilities and default correlations of Merton-type credit portfolio models in stress scenarios where a common risk factor is truncated. The analysis is performed in the class of elliptical distributions, a family of light-tailed to heavy-tailed distributions...

This paper examines the determinants of European bank risk-taking during major financial crisis. Using a sample of banks from 26 countries over the period 2005–2015, we examine the nature of the relationship between bank risk, bank characteristics, regulatory, institutional and macroeconomic...