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Credit Risk Modeling : Theory and Applications - David Lando

Credit Risk Modeling

Theory and Applications

Hardcover Published: 21st June 2004
ISBN: 9780691089294
Number Of Pages: 328

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Credit risk is today one of the most intensely studied topics in quantitative finance. This book provides an introduction and overview for readers who seek an up-to-date reference to the central problems of the field and to the tools currently used to analyze them. The book is aimed at researchers and students in finance, at quantitative analysts in banks and other financial institutions, and at regulators interested in the modeling aspects of credit risk.

David Lando considers the two broad approaches to credit risk analysis: that based on classical option pricing models on the one hand, and on a direct modeling of the default probability of issuers on the other. He offers insights that can be drawn from each approach and demonstrates that the distinction between the two approaches is not at all clear-cut. The book strikes a fruitful balance between quickly presenting the basic ideas of the models and offering enough detail so readers can derive and implement the models themselves. The discussion of the models and their limitations and five technical appendixes help readers expand and generalize the models themselves or to understand existing generalizations. The book emphasizes models for pricing as well as statistical techniques for estimating their parameters. Applications include rating-based modeling, modeling of dependent defaults, swap- and corporate-yield curve dynamics, credit default swaps, and collateralized debt obligations.

Industry Reviews

"This very well written book represents a superb presentation of both credit risk theory and its empirical evidence. It is a complete introduction to the topic, enabling the reader to access and understand current research."--Robert Jarrow, Cornell University
"This is an excellent book for researchers, financial engineers, and advanced practitioners in the field of credit risk. It is a remarkable contribution to our field."--Didier Cossin, Ecole des Hautes Etudes Commerciales, University of Lausanne
"Credit Risk Modeling provides the broadest coverage of topics I have seen in a book on credit risk. Lando successfully guides the reader through the maze of a very active field of research by clearly identifying the leading problems and the attempts that have been made to solve these problems. At the same time, never does he neglect the statistical estimation of the models he presents. This is a very valuable book to any practitioner, student, or researcher in credit risk, written by one of the leading experts in the field."--Philipp Sch nbucher, Swiss Federal Institute of Technology Zurich (ETH), author of Credit Derivatives Pricing Models

Prefacep. xi
An Overviewp. 1
Corporate Liabilities as Contingent Claimsp. 7
Introductionp. 7
The Merton Modelp. 8
The Merton Model with Stochastic Interest Ratesp. 17
The Merton Model with Jumps in Asset Valuep. 20
Discrete Coupons in a Merton Modelp. 27
Default Barriers: the Black-Cox Setupp. 29
Continuous Coupons and Perpetual Debtp. 34
Stochastic Interest Rates and Jumps with Barriersp. 36
A Numerical Scheme when Transition Densities are Knownp. 40
Towards Dynamic Capital Structure: Stationary Leverage Ratiosp. 41
Estimating Asset Value and Volatilityp. 42
On the KMV Approachp. 48
The Trouble with the Credit Curvep. 51
Bibliographical Notesp. 54
Endogenous Default Boundaries and Optimal Capital Structurep. 59
Leland's Modelp. 60
A Model with a Maturity Structurep. 64
EBIT-Based Modelsp. 66
A Model with Strategic Debt Servicep. 70
Bibliographical Notesp. 72
Statistical Techniques for Analyzing Defaultsp. 75
Credit Scoring Using Logistic Regressionp. 75
Credit Scoring Using Discriminant Analysisp. 77
Hazard Regressions: Discrete Casep. 81
Continuous-Time Survival Analysis Methodsp. 83
Markov Chains and Transition-Probability Estimationp. 87
The Difference between Discrete and Continuousp. 93
A Word of Warning on the Markov Assumptionp. 97
Ordered Probits and Ratingsp. 102
Cumulative Accuracy Profilesp. 104
Bibliographical Notesp. 106
Intensity Modelingp. 109
What Is an Intensity Model?p. 111
The Cox Process Construction of a Single Jump Timep. 112
A Few Useful Technical Resultsp. 114
The Martingale Propertyp. 115
Extending the Scope of the Cox Specificationp. 116
Recovery of Market Valuep. 117
Notes on Recovery Assumptionsp. 120
Correlation in Affine Specificationsp. 122
Interacting Intensitiesp. 126
The Role of Incomplete Informationp. 128
Risk Premiums in Intensity-Based Modelsp. 133
The Estimation of Intensity Modelsp. 139
The Trouble with the Term Structure of Credit Spreadsp. 142
Bibliographical Notesp. 143
Rating-Based Term-Structure Modelsp. 145
Introductionp. 145
A Markovian Model for Rating-Based Term Structuresp. 145
An Example of Calibrationp. 152
Class-Dependent Recoveryp. 155
Fractional Recovery of Market Value in the Markov Modelp. 157
A Generalized Markovian Modelp. 159
A System of PDEs for the General Specificationp. 162
Using Thresholds Instead of a Markov Chainp. 164
The Trouble with Pricing Based on Ratingsp. 166
Bibliographical Notesp. 166
Credit Risk and Interest-Rate Swapsp. 169
LIBORp. 170
A Useful Starting Pointp. 170
Fixed-Floating Spreads and the "Comparative-Advantage Story"p. 171
Why LIBOR and Counterparty Credit Risk Complicate Thingsp. 176
Valuation with Counterparty Riskp. 178
Netting and the Nonlinearity of Actual Cash Flows: a Simple Examplep. 182
Back to Linearity: Using Different Discount Factorsp. 183
The Swap Spread versus the Corporate-Bond Spreadp. 189
On the Swap Rate, Repo Rates, and the Riskless Ratep. 192
Bibliographical Notesp. 194
Credit Default Swaps, CDOs, and Related Productsp. 197
Some Basic Terminologyp. 197
Decomposing the Credit Default Swapp. 201
Asset Swapsp. 204
Pricing the Default Swapp. 206
Some Differences between CDS Spreads and Bond Spreadsp. 208
A First-to-Default Calculationp. 209
A Decomposition of m-of-n-to-Default Swapsp. 211
Bibliographical Notesp. 212
Modeling Dependent Defaultsp. 213
Some Preliminary Remarks on Correlation and Dependencep. 214
Homogeneous Loan Portfoliosp. 216
Asset-Value Correlation and Intensity Correlationp. 233
The Copula Approachp. 242
Network Dependencep. 245
Notesp. 249
Table of Contents provided by Publisher. All Rights Reserved.

ISBN: 9780691089294
ISBN-10: 0691089299
Series: Princeton Series in Finance
Audience: Tertiary; University or College
Format: Hardcover
Language: English
Number Of Pages: 328
Published: 21st June 2004
Country of Publication: US
Dimensions (cm): 24.28 x 15.6  x 2.49
Weight (kg): 0.61