In this essay we introduce three types of credit pricing models: first and second generation structural-form models and reduced-form models with relative papers and their main results. This paper mainly focuses on the reduced-form credit pricing model by explaining Duffie and Singleton’s paper Modeling Term Structure of Defaultable Bonds (1999). A detailed explanation of the paper’s deductions ...

The literature on credit risk consists of different approaches in modeling the behavior of defaultable bonds. The structural approach is based on the evolution of the firm value to determine default and recovery. In contrast, the more recently developed intensity-based models specify the default time exogenously. In this approach the defaultable yield curve results from the risk-free yield curv...

We present an intensity-based model of correlated defaults with application to the valuation of defaultable securities. The model assumes that the conditional hazard rate of default is driven by external common factors as well as other defaults in the system. A proposed recursive procedure can be used to generate default times with a broad class of correlation structures. We compare this approa...

This large allocation clearly indicates that sponsors should carefully scrutinize the risk and monitor the returns of their bond positions. Unfortunately, bond portfolios are not as simple to analyze as they once were since managers no longer restrict themselves to holdings in government, agency and high grade corporate issues. Mortgages now comprise approximately 25% of the market and so are c...

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...

This paper provides a new methodology for estimating the term structure of corporate debt using a semiparametric penalized spline model. The method is applied to a case study of AT&T bonds. Typically, very little data is available on individual corporate bond prices, too little to find a nonparametric estimate of term structure from these bonds alone. This problem is solved by “borrowing streng...