Calibration Of Structural Credit Risk Models

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Calibration of Structural Credit Risk Models

Author : Søren Willemann
Publisher :
ISBN 13 :
Total Pages : 38 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Calibration of Structural Credit Risk Models by : Søren Willemann

Download or read book Calibration of Structural Credit Risk Models written by Søren Willemann and published by . This book was released on 2004 with total page 38 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical tests of structural credit risk models typically ignore bond prices when estimating parameters. In this paper we depart from this, examining a calibration of the Collin-Dufresne amp; Goldstein (2001) model to bond prices. Using alternative specifications of a liquidity discount we evaluate the model based on fit to yield spreads and sensitivities to underlying fundamentals, producing a novel approach to evaluating the fit of a credit risk model. When augmenting with a liquidity discount we obtain a very good fit and outperform a two-factor reduced form model. Generally we understate the sensitivity towards changes in the leverage ratio and to a larger degree changes in the short interest rate. For investment grade bonds the model attributes 40% of the yield spread at 5 years of maturity to credit risk, in some agreement with the literature.

Calibrating Structural Models

Author : Santiago Forte
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Calibrating Structural Models by : Santiago Forte

Download or read book Calibrating Structural Models written by Santiago Forte and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a modified version of Leland and Toft's (1996) structural credit risk model, together with a novel calibration methodology based on stock and CDS data: the firm asset value and volatility are consistently derived from equity prices; the default barrier is calibrated from CDS premia. It empirically shows that as long as the appropriate default barrier is selected, the model generates time series of stock market implied credit spreads which fit the times series of CDS spreads. Moreover, CDS implied default barriers prove to be consistent with stockholders' rationality, with predictions made by structural models with endogenous default, and with historical recovery rates.

Structural Credit Risk Models

Author : Mads Gjedsted Nielsen
Publisher : LAP Lambert Academic Publishing
ISBN 13 : 9783844306118
Total Pages : 120 pages
Book Rating : 4.3/5 (61 download)

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Book Synopsis Structural Credit Risk Models by : Mads Gjedsted Nielsen

Download or read book Structural Credit Risk Models written by Mads Gjedsted Nielsen and published by LAP Lambert Academic Publishing. This book was released on 2011-02 with total page 120 pages. Available in PDF, EPUB and Kindle. Book excerpt: Three different credit risk models are presented, implemented, and calibrated to real data. Each of which presents a different way to model the dynamics of a firm. To better examine their differences, the models are benchmarked against the much celebrated Merton's model. Generally it is shown that structural credit risk models have empirical validity. However, all is not perfect. Since structural credit risk models may have two objectives. One being to accurately predict credit spreads, and another to determine the optimal capital structure. It is argued that if the goal is the former, then future structural models need to incorporate a more exible framework that can price the many di erent types of bonds that make up a company s debt simultaneously. However, if the objective is the latter, then the future models need to better account for the high costs linked with capital restructures in times of nancial distress.

Recent Developments in Mathematical, Statistical and Computational Sciences

Author : D. Marc Kilgour
Publisher : Springer
ISBN 13 : 9783030635930
Total Pages : 0 pages
Book Rating : 4.6/5 (359 download)

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Book Synopsis Recent Developments in Mathematical, Statistical and Computational Sciences by : D. Marc Kilgour

Download or read book Recent Developments in Mathematical, Statistical and Computational Sciences written by D. Marc Kilgour and published by Springer. This book was released on 2022-08-31 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book constitutes an up-to-date account of principles, methods, and tools for mathematical and statistical modelling in a wide range of research fields, including medicine, health sciences, biology, environmental science, engineering, physics, chemistry, computation, finance, economics, and social sciences. It presents original solutions to real-world problems, emphasizes the coordinated development of theories and applications, and promotes interdisciplinary collaboration among mathematicians, statisticians, and researchers in other disciplines. Based on a highly successful meeting, the International Conference on Applied Mathematics, Modeling and Computational Science, AMMCS 2019, held from August 18 to 23, 2019, on the main campus of Wilfrid Laurier University, Waterloo, Canada, the contributions are the results of submissions from the conference participants. They provide readers with a broader view of the methods, ideas and tools used in mathematical, statistical and computational sciences.

Specification Analysis of Structural Credit Risk Models

Author : Jing-Zhi Huang
Publisher :
ISBN 13 :
Total Pages : 61 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Specification Analysis of Structural Credit Risk Models by : Jing-Zhi Huang

Download or read book Specification Analysis of Structural Credit Risk Models written by Jing-Zhi Huang and published by . This book was released on 2019 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical studies of structural credit risk models so far are often based on calibration, rolling estimation, or regressions. This paper proposes a GMM-based method that allows us to both consistently estimate the model parameters and test whether all the restrictions of the model are satisfied. We conduct a specification analysis of five representative structural models based on the proposed GMM procedure, using information from both equity volatility and term structures of single-name credit default swap (CDS) spreads. Our test results strongly reject the Merton (1974) model and two diffusion-based models with a constant default boundary. The other two models, one with jumps and one with stationary leverage ratios, do improve the overall fit of CDS spreads and equity volatility. However, all five models have difficulty capturing the dynamic behavior of both equity volatility and CDS spreads, especially for investment-grade names. On the other hand, these models have a much better ability to explain the sensitivity of CDS spreads to equity returns.

Static and Dynamic Modelling of Credit Default Risk

Author : Louis-Étienne Salmon-Bélisle
Publisher :
ISBN 13 :
Total Pages : 111 pages
Book Rating : 4.:/5 (96 download)

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Book Synopsis Static and Dynamic Modelling of Credit Default Risk by : Louis-Étienne Salmon-Bélisle

Download or read book Static and Dynamic Modelling of Credit Default Risk written by Louis-Étienne Salmon-Bélisle and published by . This book was released on 2014 with total page 111 pages. Available in PDF, EPUB and Kindle. Book excerpt: Credit risk modelling can take many different approaches. Each method has its strengths and weaknesses and studying a variety of them can help find new ways of performing credit risk analysis. We present here three different models, each classified either as static or dynamic, and structural or reduced-form. The static structural model from Lucas et al. (2000) helps us derive a moment behaviour theorem within the dynamic structural setting of Bush et al. (2011). For comparison, we also present the dynamic reduced-form model of Giesecke et al. (2012). A calibration exercise of the dynamic structural model is implemented and we study its performance through changing financial environment. This highlights the horse race between simplicity and efficiency of a model that still needs to be adequately addressed, as the results from the calibration show the difficulty of capturing the key financial environment's aspects.

Introduction to Credit Risk Modeling

Author : Christian Bluhm
Publisher : CRC Press
ISBN 13 : 1584889934
Total Pages : 386 pages
Book Rating : 4.5/5 (848 download)

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Book Synopsis Introduction to Credit Risk Modeling by : Christian Bluhm

Download or read book Introduction to Credit Risk Modeling written by Christian Bluhm and published by CRC Press. This book was released on 2016-04-19 with total page 386 pages. Available in PDF, EPUB and Kindle. Book excerpt: Contains Nearly 100 Pages of New MaterialThe recent financial crisis has shown that credit risk in particular and finance in general remain important fields for the application of mathematical concepts to real-life situations. While continuing to focus on common mathematical approaches to model credit portfolios, Introduction to Credit Risk Modelin

An Empirical Evaluation of Structural Credit Risk Models

Author : Nikola A. Tarashev
Publisher :
ISBN 13 :
Total Pages : 56 pages
Book Rating : 4.3/5 ( download)

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Book Synopsis An Empirical Evaluation of Structural Credit Risk Models by : Nikola A. Tarashev

Download or read book An Empirical Evaluation of Structural Credit Risk Models written by Nikola A. Tarashev and published by . This book was released on 2005 with total page 56 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper evaluates empirically the performance of six structural credit risk models by comparing the probabilities of default (PDs) they deliver to ex post default rates. In contrast to previous studies pursuing similar objectives, the paper employs firm-level data and finds that theory-based PDs tend to match closely the actual level of credit risk and to account for its time path. At the same time, nonmodelled macro variables from the financial and real sides of the economy help to substantially improve the forecasts of default rates. The finding suggests that theory-based PDs fail to fully reflect the dependence of credit risk on the business and credit cycles. Most of the upbeat conclusions regarding the performance of the PDs are due to models with endogenous default. For their part, frameworks that assume exogenous default tend to underpredict credit risk. Three borrower characteristics influence materially the predictions of the models: the leverage ratio; the default recovery rate; and the risk-free rate of return.

Reduced Form vs. Structural Models of Credit Risk

Author : Navneet Arora
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Reduced Form vs. Structural Models of Credit Risk by : Navneet Arora

Download or read book Reduced Form vs. Structural Models of Credit Risk written by Navneet Arora and published by . This book was released on 2005 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper, we empirically compare two structural models (basic Merton and Vasicek-Kealhofer (VK)) and one reduced-form model (Hull-White (HW)) of credit risk. We propose here that two useful purposes for credit models are default discrimination and relative value analysis. We test the ability of the Merton and VK models to discriminate defaulters from non-defaulters based on default probabilities generated from information in the equity market. We test the ability of the HW model to discriminate defaulters from non-defaulters based on default probabilities generated from information in the bond market. We find the VK and the HW models exhibit comparable accuracy ratios as well as substantially outperform the simple Merton model. We also test the ability of each model to predict spreads in the credit default swap (CDS) market as an indication of each model's strength as a relative value analysis tool. We find the VK model tends to do the best across the full sample and relative sub-samples except for cases where an issuer has many bonds in the market. In this case, the HW model tends to do the best. The empirical evidence will assist market participants in determining which model is most useful based on their purpose in hand. On the structural side, a basic Merton model is not good enough; appropriate modifications to the framework make a difference. On the reduced-form side, the quality and quantity of data make a difference; many traded issuers will not be well modeled in this way unless they issue more traded debt. In addition, bond spreads at shorter tenors (less than two years) tend to be less correlated with CDS spreads. This makes accurate calibration of the term-structure of credit risk difficult from bond data.

Credit Risk

Author : Niklas Wagner
Publisher : CRC Press
ISBN 13 : 1584889950
Total Pages : 600 pages
Book Rating : 4.5/5 (848 download)

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Book Synopsis Credit Risk by : Niklas Wagner

Download or read book Credit Risk written by Niklas Wagner and published by CRC Press. This book was released on 2008-05-28 with total page 600 pages. Available in PDF, EPUB and Kindle. Book excerpt: Featuring contributions from leading international academics and practitioners, Credit Risk: Models, Derivatives, and Management illustrates how a risk management system can be implemented through an understanding of portfolio credit risks, a set of suitable models, and the derivation of reliable empirical results. Divided into six sectio

Credit Risk: Modeling, Valuation and Hedging

Author : Tomasz R. Bielecki
Publisher : Springer Science & Business Media
ISBN 13 : 3662048213
Total Pages : 517 pages
Book Rating : 4.6/5 (62 download)

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Book Synopsis Credit Risk: Modeling, Valuation and Hedging by : Tomasz R. Bielecki

Download or read book Credit Risk: Modeling, Valuation and Hedging written by Tomasz R. Bielecki and published by Springer Science & Business Media. This book was released on 2013-03-14 with total page 517 pages. Available in PDF, EPUB and Kindle. Book excerpt: The motivation for the mathematical modeling studied in this text on developments in credit risk research is the bridging of the gap between mathematical theory of credit risk and the financial practice. Mathematical developments are covered thoroughly and give the structural and reduced-form approaches to credit risk modeling. Included is a detailed study of various arbitrage-free models of default term structures with several rating grades.

Understanding and Managing Model Risk

Author : Massimo Morini
Publisher : John Wiley & Sons
ISBN 13 : 0470977612
Total Pages : 452 pages
Book Rating : 4.4/5 (79 download)

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Book Synopsis Understanding and Managing Model Risk by : Massimo Morini

Download or read book Understanding and Managing Model Risk written by Massimo Morini and published by John Wiley & Sons. This book was released on 2011-11-07 with total page 452 pages. Available in PDF, EPUB and Kindle. Book excerpt: A guide to the validation and risk management of quantitative models used for pricing and hedging Whereas the majority of quantitative finance books focus on mathematics and risk management books focus on regulatory aspects, this book addresses the elements missed by this literature--the risks of the models themselves. This book starts from regulatory issues, but translates them into practical suggestions to reduce the likelihood of model losses, basing model risk and validation on market experience and on a wide range of real-world examples, with a high level of detail and precise operative indications.

Credit Default Swap Calibration and Equity Swap Valuation Under Counterparty Risk with a Tractable Structural Model

Author : Damiano Brigo
Publisher :
ISBN 13 :
Total Pages : 36 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Credit Default Swap Calibration and Equity Swap Valuation Under Counterparty Risk with a Tractable Structural Model by : Damiano Brigo

Download or read book Credit Default Swap Calibration and Equity Swap Valuation Under Counterparty Risk with a Tractable Structural Model written by Damiano Brigo and published by . This book was released on 2005 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we develop a tractable structural model with analytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. We essentially show how to use structural models with a calibration capability that is typical of the much more tractable credit-spread based intensity models. We apply the structural model to a concrete calibration case and observe what happens to the calibrated dynamics when the CDS-implied credit quality deteriorates as the firm approaches default. Finally we provide a typical example of a case where the calibrated structural model can be used for credit pricing in a much more convenient way than a calibrated reduced form model: The pricing of counterparty risk in an equity swap.

Modelling and Calibration Errors in Measures of Portfolio Credit Risk

Author : Nikola A. Tarashev
Publisher :
ISBN 13 :
Total Pages : 48 pages
Book Rating : 4.3/5 ( download)

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Book Synopsis Modelling and Calibration Errors in Measures of Portfolio Credit Risk by : Nikola A. Tarashev

Download or read book Modelling and Calibration Errors in Measures of Portfolio Credit Risk written by Nikola A. Tarashev and published by . This book was released on 2007 with total page 48 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper develops an empirical procedure for analyzing the impact of model misspecification and calibration errors on measures of portfolio credit risk. When applied to large simulated portfolios with realistic characteristics, this procedure reveals that violations of key assumptions of the well-known Asymptotic Single-Risk Factor (ASRF) model are virtually inconsequential. By contrast, flaws in the calibrated interdependence of credit risk across exposures, which are driven by plausible small-sample estimation errors or popular rule-of-thumb values of asset return correlations, can lead to significant inaccuracies in measures of portfolio credit risk. Similar inaccuracies arise under erroneous, albeit standard, assumptions regarding the tails of the distribution of asset returns.

Hedging & Calibration for Credit Risk Models

Author : Ian Ward
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (93 download)

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Book Synopsis Hedging & Calibration for Credit Risk Models by : Ian Ward

Download or read book Hedging & Calibration for Credit Risk Models written by Ian Ward and published by . This book was released on 2009 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:

Credit Risk Frontiers

Author : Tomasz Bielecki
Publisher : John Wiley & Sons
ISBN 13 : 157660358X
Total Pages : 770 pages
Book Rating : 4.5/5 (766 download)

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Book Synopsis Credit Risk Frontiers by : Tomasz Bielecki

Download or read book Credit Risk Frontiers written by Tomasz Bielecki and published by John Wiley & Sons. This book was released on 2011-02-08 with total page 770 pages. Available in PDF, EPUB and Kindle. Book excerpt: A timely guide to understanding and implementing credit derivatives Credit derivatives are here to stay and will continue to play a role in finance in the future. But what will that role be? What issues and challenges should be addressed? And what lessons can be learned from the credit mess? Credit Risk Frontiers offers answers to these and other questions by presenting the latest research in this field and addressing important issues exposed by the financial crisis. It covers this subject from a real world perspective, tackling issues such as liquidity, poor data, and credit spreads, as well as the latest innovations in portfolio products and hedging and risk management techniques. Provides a coherent presentation of recent advances in the theory and practice of credit derivatives Takes into account the new products and risk requirements of a post financial crisis world Contains information regarding various aspects of the credit derivative market as well as cutting edge research regarding those aspects If you want to gain a better understanding of how credit derivatives can help your trading or investing endeavors, then Credit Risk Frontiers is a book you need to read.

Credit Risk in Pure Jump Structural Models

Author : Elisa Luciano
Publisher :
ISBN 13 :
Total Pages : 23 pages
Book Rating : 4.:/5 (129 download)

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Book Synopsis Credit Risk in Pure Jump Structural Models by : Elisa Luciano

Download or read book Credit Risk in Pure Jump Structural Models written by Elisa Luciano and published by . This book was released on 2006 with total page 23 pages. Available in PDF, EPUB and Kindle. Book excerpt: Structural models of credit risk are known to present vanishing spreads at very short maturities. This shortcoming, which is due to the diffusive behavior assumed for asset values, can be circumvented by considering discontinuities of the jump type in their evolution over time. In particular, assuming a pure jump process. Moreover, when applied to market data diffusion-based structural models tend to produce too low spreads, even over longer horizons. In this paper we show that a jump process of the Variance-Gamma type for the asset value can also circumvent this practical shortcoming. We calibrate a terminal-default jump structural model to single-name data for the CDX NA IG and CDX NA HY components. We show that the VG model provides not only smaller errors, but also a better qualitative fit than other diffusive structural models. Indeed, it avoids both the spread underprediction of the classical Merton model and the excessive overpredictions of other well known diffusive models, as recently explored by Eom, Helwege, Huang (2004) or Demchuk and Gibson (2005).