scholarly journals Asymptotic Analysis for One-Name Credit Derivatives

2013 ◽  
Vol 2013 ◽  
pp. 1-9
Author(s):  
Yong-Ki Ma ◽  
Beom Jin Kim
Keyword(s):  
Asymptotic Analysis ◽  
Stochastic Volatility ◽  
Credit Derivatives ◽  
Approximate Solutions ◽  
Credit Default Swaps ◽  
Rate Process ◽  
Yield Curves ◽  
Defaultable Bond ◽  
Credit Default ◽  
Bond Options

We propose approximate solutions to price defaultable zero-coupon bonds as well as the corresponding credit default swaps and bond options. We consider the intensity-based approach of a two-correlated-factor Hull-White model with stochastic volatility of interest rate process. Perturbations from the stochastic volatility are computed by using an asymptotic analysis. We also study the sensitive properties of the defaultable bond prices and the yield curves.

scholarly journals CREDIT DERIVATIVES PRICING WITH STOCHASTIC VOLATILITY MODELS

2013 ◽  
Vol 16 (04) ◽  
pp. 1350019 ◽  
Author(s):  
CARL CHIARELLA ◽  
SAMUEL CHEGE MAINA ◽  
CHRISTINA NIKITOPOULOS SKLIBOSIOS
Keyword(s):  
Interest Rates ◽  
Stochastic Volatility ◽  
Numerical Study ◽  
Credit Derivatives ◽  
Credit Default Swaps ◽  
Bond Prices ◽  
Derivatives Pricing ◽  
Defaultable Bond ◽  
Credit Default ◽  
Model Features

This paper proposes a model for pricing credit derivatives in a defaultable HJM framework. The model features hump-shaped, level dependent, and unspanned stochastic volatility, and accommodates a correlation structure between the stochastic volatility, the default-free interest rates, and the credit spreads. The model is finite-dimensional, and leads (a) to exponentially affine default-free and defaultable bond prices, and (b) to an approximation for pricing credit default swaps and swaptions in terms of defaultable bond prices with varying maturities. A numerical study demonstrates that the model captures stylized various features of credit default swaps and swaptions.

PRICING COUNTERPARTY RISK INCLUDING COLLATERALIZATION, NETTING RULES, RE-HYPOTHECATION AND WRONG-WAY RISK

2013 ◽  
Vol 16 (02) ◽  
pp. 1350007 ◽  
Author(s):  
DAMIANO BRIGO ◽  
AGOSTINO CAPPONI ◽  
ANDREA PALLAVICINI ◽  
VASILEIOS PAPATHEODOROU
Keyword(s):  
Interest Rate ◽  
Credit Derivatives ◽  
Credit Default Swaps ◽  
Credit Spread ◽  
Counterparty Risk ◽  
Default Correlation ◽  
Dynamical Models ◽  
Credit Default ◽  
The Impact

This article is concerned with the arbitrage-free valuation of bilateral counterparty risk through stochastic dynamical models when collateral is included, with possible rehypothecation. The payout of claims is modified to account for collateral margining in agreement with International Swap and Derivatives Association (ISDA) documentation. The analysis is specialized to interest-rate and credit derivatives. In particular, credit default swaps are considered to show that a perfect collateralization cannot be achieved under default correlation. Interest rate and credit spread volatilities are fully accounted for, as is the impact of re-hypothecation, collateral margining frequency, and dependencies.

scholarly journals Credit Market Speculation and the Cost of Capital

2014 ◽  
Vol 6 (4) ◽  
pp. 1-34 ◽  
Author(s):  
Yeon-Koo Che ◽  
Rajiv Sethi
Keyword(s):  
Multiple Equilibria ◽  
Cost Of Capital ◽  
Credit Derivatives ◽  
Credit Market ◽  
Credit Default Swaps ◽  
Cost Of Debt ◽  
Insurable Interest ◽  
Rollover Risk ◽  
Credit Default ◽  
The Cost

We examine the effects of speculation using credit derivatives on the cost of debt and the likelihood of default. The availability of credit default swaps induces investors who are optimistic about borrower revenues to sell protection instead of buying bonds. This benefits borrowers if protection can only be bought with an insurable interest, but can increase the cost of debt and crowd out productive lending if protection can be purchased as a bet on default. We also show that the possibility of speculation on default may cause multiple equilibria and exacerbate the problem of rollover risk. (JEL D86, G13, G31)

scholarly journals Valuation of Credit Derivatives with Multiple Time Scales in the Intensity Model

2014 ◽  
Vol 2014 ◽  
pp. 1-12
Author(s):  
Beom Jin Kim ◽  
Chan Yeol Park ◽  
Yong-Ki Ma
Keyword(s):  
Time Scales ◽  
Yield Curve ◽  
Credit Derivatives ◽  
Credit Default Swap ◽  
Approximate Solutions ◽  
Multiple Time Scales ◽  
Multiple Time ◽  
Bond Price ◽  
Defaultable Bond ◽  
Default Intensity

We propose approximate solutions for pricing zero-coupon defaultable bonds, credit default swap rates, and bond options based on the averaging principle of stochastic differential equations. We consider the intensity-based defaultable bond, where the volatility of the default intensity is driven by multiple time scales. Small corrections are computed using regular and singular perturbations to the intensity of default. The effectiveness of these corrections is tested on the bond price and yield curve by investigating the behavior of the time scales with respect to the relevant parameters.

DEFAULTABLE LÉVY LIBOR RATES AND CREDIT DERIVATIVES

2007 ◽  
Vol 10 (03) ◽  
pp. 407-435 ◽  
Author(s):  
FLORIAN HUEHNE
Keyword(s):  
Credit Risk ◽  
Term Structure ◽  
Credit Derivatives ◽  
Credit Default Swaps ◽  
Credit Spreads ◽  
Risk Modeling ◽  
Forward Measure ◽  
Credit Default ◽  
Finance Theory ◽  
Phd Thesis

We introduce the intensity-based defaultable Lévy Libor model, which generalizes the default-free Lévy Libor model introduced by Eberlein and Özkan in [The defaultable Lévy term structure: Ratings and restructuring, Mathematical Finance13(2) (2003) 277–300], and the intensity-based defaultable model presented by Bielecki and Rutkowski in [Credit Risk: Modeling, Valuation and Hedging, Springer Finance (Springer-Verlag, 2002)] by embedding it in the defaultable HJM framework introduced by Eberlein and Özkan in [The defaultable Lévy term structure: Ratings and restructuring, Mathematical Finance13(2) (2003) 277–300]. We also derive some additional results for defaultable HJM models such as the dynamics of credit spreads. We then go on and model the default-free Libor rates and credit spreads as the primal variable and derive the dynamics of the defaultable Libor rates under the defaultable forward measure. Finally, we derive an explicit formula for options on credit default swaps, using an idea introduced by Raible in [Lévy Processes in finance: Theory, numerics and empirical facts, PhD thesis, University of Freiburg i. Brsg. (2000)].

NEW MODEL FOR PRICING QUANTO CREDIT DEFAULT SWAPS

2019 ◽  
Vol 22 (03) ◽  
pp. 1950003
Author(s):  
A. ITKIN ◽  
V. SHCHERBAKOV ◽  
A. VEYGMAN
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Foreign Exchange ◽  
Credit Derivatives ◽  
Partition Of Unity ◽  
Credit Default Swaps ◽  
Foreign Exchange Rate ◽  
New Model ◽  
Credit Default ◽  
Risky Bonds

We propose a new model for pricing quanto credit default swaps (CDS) and risky bonds. The model operates with four stochastic factors, namely: the hazard rate, the foreign exchange rate, the domestic interest rate, and the foreign interest rate, and allows for jumps-at-default in both the foreign exchange rate and the foreign interest rate. Corresponding systems of partial differential equations are derived similar to how this is done by Bielecki et al. [PDE approach to valuation and hedging of credit derivatives, Quantitative Finance 5 (3), 257–270]. A localized version of the Radial Basis Function partition of unity method is used to solve these four-dimensional equations. The results of our numerical experiments qualitatively explain the discrepancies observed in the marked values of CDS spreads traded in domestic and foreign economies.

Sign in / Sign up

Export Citation Format

Share Document