Default Risk in Bond and Credit Derivatives Markets

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Springer Science & Business Media, Aug 5, 2004 - Business & Economics - 135 pages
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Due to the scarcity of reliable data, the existing literature on default risk still displays an imbalance between theoretical and empirical contributions. Consequently, the focus of this book is on empirical work. Within an intensity based modelling framework a broad range of promising specifications is tested using corporate bond data. The book provides one of the most comprehensive empirical studies in the field, from Kalman filtration of affine term structure models to the use of Efficient Method of Moments estimation of dynamic term structure models in a default risky context. Filling another gap in empirical research, the book devotes special attention to the identification factors that can explain credit default swap premia.

 

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Contents

Introduction
1
On the Economic Content of Models of Default Risk
7
22 A Criterion for Economic Interpretability
8
23 Models of Default Risk
9
232 Firm Value Models
11
233 Hybrid Approaches
13
24 Interpretability of Firm Value Models
14
25 Conclusion
20
422 Implementation
59
423 Results
60
4232 In and OutofSample Fit
63
4233 Parameter Estimates
65
43 Estimation of Completely Affine Term Structure Models for Spreads
69
431 Implementation
70
4322 In and OutofSample Fit
72
44 Incorporating Correlation
73

IntensityBased Modeling of Default
21
32 Default Arrival and the Default Event
22
33 The Hazard Rate
24
34 Loss Given Default
25
342 Recovery Regime
26
35 Defaultable Bond Prices
27
36 Implications for the Empirical Studies
30
37 Affine Term Structure Models in the Context of Default Risk
31
371 Model Description
32
372 Completely Affine Models with Independent Factors
33
373 Incorporating Correlation between RiskFree and Risky Rates
36
Essentially Affine Specifications
39
38 Summary and Outlook
41
The Empirical Performance of ReducedForm Models of Default Risk
43
412 Defaultable Term Structure Estimation
44
413 RiskFree Term Structure Estimation
49
414 Discussion of Data Quality
50
42 Estimation of Completely Affine Term Structure Models for Defaultable Rates
53
421 Estimation Technique
54
4212 StateSpace Specification
55
4213 Kalman Filter Mechanism
57
442 Results
74
4421 In and OutofSample Fit
75
4422 Parameter Estimates
77
45 Estimation of Essentially Affine Term Structure Models for Defaultable Rates
79
452 Implementation
83
453 Results
84
4532 Structural Model
86
46 Summary
89
Explaining Credit Default Swap Premia
91
52 Modeling Idea
94
53 Data
98
54 Estimation and Results
103
55 Robustness Checks
107
56 Conclusion
109
Conclusion
111
Calculation of Volatility Proxies
115
Tables for Chapter 4
117
Tables for Chapter 5
123
References
131
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