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Credit Risk : Pricing, Measurement, and Management - Darrell Duffie

Credit Risk

Pricing, Measurement, and Management

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Published: 26th January 2003
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In this book, two of America's leading economists provide the first integrated treatment of the conceptual, practical, and empirical foundations for credit risk pricing and risk measurement. Masterfully applying theory to practice, Darrell Duffie and Kenneth Singleton model credit risk for the purpose of measuring portfolio risk and pricing defaultable bonds, credit derivatives, and other securities exposed to credit risk. The methodological rigor, scope, and sophistication of their state-of-the-art account is unparalleled, and its singularly in-depth treatment of pricing and credit derivatives further illuminates a problem that has drawn much attention in an era when financial institutions the world over are revising their credit management strategies.

Duffie and Singleton offer critical assessments of alternative approaches to credit-risk modeling, while highlighting the strengths and weaknesses of current practice. Their approach blends in-depth discussions of the conceptual foundations of modeling with extensive analyses of the empirical properties of such credit-related time series as default probabilities, recoveries, ratings transitions, and yield spreads. Both the "structura" and "reduced-form" approaches to pricing defaultable securities are presented, and their comparative fits to historical data are assessed. The authors also provide a comprehensive treatment of the pricing of credit derivatives, including credit swaps, collateralized debt obligations, credit guarantees, lines of credit, and spread options. Not least, they describe certain enhancements to current pricing and management practices that, they argue, will better position financial institutions for future changes in the financial markets.

"Credit Risk" is an indispensable resource for risk managers, traders or regulators dealing with financial products with a significant credit risk component, as well as for academic researchers and students.

"This is certainly the best book on credit risk available on the market for academics and practitioners. I recommend the book to academics and professionals, and also for the teaching of credit risk at Masters and PhD levels."--Georges Dionne, Journal of Risk and Insurance

Prefacep. xi
Acknowledgmentsp. xiii
Introductionp. 1
A Brief Zoology of Risksp. 3
Organization of Topicsp. 7
Economic Principles of Risk Managementp. 12
What Types of Risk Count Most?p. 13
Economics of Market Riskp. 15
Economic Principles of Credit Riskp. 26
Risk Measurementp. 29
Measuring Credit Riskp. 38
Default Arrival: Historical Patterns and Statistical Modelsp. 43
Introductionp. 43
Structural Models of Default Probabilityp. 53
From Theory to Practice: Using Distance to Default to Predict Defaultp. 57
Default Intensityp. 59
Examples of Intensity Modelsp. 64
Default-Time Simulationp. 72
Statistical Prediction of Bankruptcyp. 74
Ratings Transitions: Historical Patterns and Statistical Modelsp. 85
Average Transition Frequenciesp. 85
Ratings Risk and the Business Cyclep. 87
Ratings Transitions and Agingp. 91
Ordered Probits of Ratingsp. 92
Ratings as Markov Chainsp. 94
Conceptual Approaches to Valuation of Default Riskp. 100
Introductionp. 100
Risk-Neutral versus Actual Probabilitiesp. 102
Reduced-Form Pricingp. 106
Structural Modelsp. 112
Comparisons of Model-Implied Spreadsp. 114
From Actual to Risk-Neutral Intensitiesp. 118
Pricing Corporate and Sovereign Bondsp. 122
Uncertain Recoveryp. 122
Reduced-Form Pricing with Recoveryp. 125
Ratings-Based Models of Credit Spreadsp. 137
Pricing Sovereign Bondsp. 146
Empirical Models of Defaultable Bond Spreadsp. 156
Credit Spreads and Economic Activityp. 156
Reference Curves for Spreadsp. 162
Parametric Reduced-Form Modelsp. 166
Estimating Structural Modelsp. 169
Parametric Models of Sovereign Spreadsp. 171
Credit Swapsp. 173
Other Credit Derivativesp. 173
The Basic Credit Swapp. 175
Simple Credit-Swap Spreadsp. 178
Model-Based CDS Ratesp. 185
The Role of Asset Swapsp. 190
Optional Credit Pricingp. 194
Spread Optionsp. 194
Callable and Convertible Corporate Debtp. 201
A Simple Convertible Bond Pricing Modelp. 215
Correlated Defaultsp. 229
Alternative Approaches to Correlationp. 229
CreditMetrics Correlated Defaultsp. 230
Correlated Default Intensitiesp. 233
Copula-Based Correlation Modelingp. 237
Empirical Methodsp. 242
Default-Time Simulation Algorithmsp. 243
Joint Default Eventsp. 247
Collateralized Debt Obligationsp. 250
Introductionp. 250
Some Economics of CDOsp. 252
Default-Risk Modelp. 255
Pricing Examplesp. 260
Default Loss Analyticsp. 271
Computation of Diversity Scoresp. 280
Over-the-Counter Default Risk and Valuationp. 285
Exposurep. 285
OTC Credit Risk Value Adjustmentsp. 295
Additional Swap Credit Adjustmentsp. 304
Credit Spreads on Currency Swapsp. 311
Integrated Market and Credit Risk Measurementp. 314
Market Risk Factorsp. 315
Delta-Gamma for Derivatives with Jumpsp. 326
Integration of Market and Credit Riskp. 332
Examples of VaR with Credit Riskp. 334
Introduction to Affine Processesp. 346
Econometrics of Affine Term-Structure Modelsp. 362
HJM Spread Curve Modelsp. 367
Referencesp. 371
Indexp. 385
Table of Contents provided by Syndetics. All Rights Reserved.

ISBN: 9780691090467
ISBN-10: 0691090467
Series: Princeton Series in Finance
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 416
Published: 26th January 2003
Publisher: Princeton University Press
Country of Publication: US
Dimensions (cm): 23.8 x 16.3  x 3.1
Weight (kg): 0.72