We consider the intensity-based approach for the modeling of default times of one or more companies. In this approach the default times are defined as the jump times of a Cox process, which is a Poisson process conditional on the realization of its intensity. We assume that the intensity follows the Cox-Ingersoll-Ross model. This model allows one to calculate survival probabilities and prices o...

We study the market for credit default swaps (CDS) between 2003 and 2008 in order to understand origins of the well documented tendency for credit spreads on diverse issues to periodically undergo large, common adjustments in the same direction and of similar magnitudes. Our methodology allows us to distinguish co-movements that reflect common revisions in the statistical default distribution f...

We develop an arbitrage-free valuation framework for bilateral counterparty risk, where collateral is included with possible re-hypothecation. We show that the adjustment is given by the sum of two option payoff terms, where each term depends on the netted exposure, i.e. the difference between the on-default exposure and the pre-default collateral account. We then specialize our analysis to Cre...

the main idea of this paper is to study the dependence between the probability of default and the recovery rate on credit portfolio and to seek empirically this relationship. we examine the dependence between pd and rr by theoretical approach. for the empirically methodology, we use the bootstrapped quantile regression and the simultaneous quantile regression. these methods allow to determinate...

Recent advances in the theory of credit risk allow the use of standard term structure machinery for default risk modeling and estimation. The empirical literature in this area often interprets the drift adjustments of the default intensity’s diffusion state variables as the only default risk premium. We show that this interpretation implies a restriction on the form of possible default risk pre...

In this paper we present some results of research in default hierarchies formation. A default hierarchy is a set of rules that models a set of environmental states in which some default rules cover most of the environmental states while specific ones cover exceptions. It is well known that default hierarchies can be used to categorize environmental states very efficiently. In fact, a default hi...

We introduce a discrete time no-arbitrage model with observable covariates, which allows for a closed form solution for the value of credit default swaps (CDS). The default intensity is speci…ed as a quadratic function of the covariates, ensuring that the intensity function is always positive. The model yields economically plausible results in terms of …t, sign of coe¢ cients and statistical si...

It is well known that a defaultable bond subject to recovery of market value (RMV) is priced by discounting the payoff with an adjusted short rate by the loss rate and the default intensity rate of the issuer. We show that the formula can be generalized for a defaultable contract subject to RMV with heterogeneous multiple reference firms. The discounting short rate is adjusted by sum of the los...

We develop stock option price approximations for a model which takes both the risk of default and the stochastic volatility into account. We also let the intensity of defaults be influenced by the volatility. We show that it might be possible to infer the risk neutral default intensity from the stock option prices. Our option price approximation has a rich implied volatility surface structure a...