Recent Advances in Credit Risk Modeling
Jose Giancarlo Gasha, Mr. Andre Santos, Mr. Jorge A. Chan-Lau, Carlos I. Medeiros, Marcos Souto, Christian Capuano
International Monetary Fund, Aug 1, 2009 - Business & Economics - 31 pages
As is well known, most models of credit risk have failed to measure the credit risks in the context of the global financial crisis. In this context, financial industry representatives, regulators and academics worldwide have given new impetus to efforts to improve credit risk modeling for countries, corporations, financial institutions, and financial instruments. The paper summarizes some of the recent advances in this regard. It considers modifications of structural models, including of the classical Merton model, and efforts to reconcile the structural and the reduced-form models. It also discusses the reassessment of the default correlations using copulas, the pricing of credit index options, and the determination of the prices of distressed debt and estimation of recovery values.
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II Structural Models
III ReducedForm Models
IV Other Innovations in the Modeling of Credit Risk
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approach arbitrage-free arbitrage-free option formula arrow and Lin arrow and Protter asset value assumptions Bank Basel II calibration Chan-Lau common factor conditional distribution context corporate Correlation Using Copulas credit default swaps credit derivatives credit index options credit risk models currency mismatches default barrier default correlation default distribution default event default indicator default intensities default occurs default risk default threshold default-at-maturity distance-to-default distressed debt distressed debt prices Duffie and Lando empirical equity exchange rate filtration firm framework Frey and Runggaldier front-end protection full-information value Gaussian copula global financial crisis IMF Working Paper incomplete information index spread International Monetary Fund investors iTraxx liabilities market option formula Markov chain modeling of credit Morini and Brigo multiple defaults numeraire pricing of credit pricing trend probability of default random variables recorded default rate reduced-form models stochastic stochastic process Stochastic Volatility strike price structural and reduced-form time-change traded credit derivatives volatility smile