We compare the durations of corporate and Treasury bonds in the reducedform, intensity based credit risk modeling framework. In the case where default risk is independent of default-free interest rates, we provide in each of the three most popular recovery regimes a sufficient condition under which the duration of the corporate bond is smaller than the duration of a similar Treasury bond. In th...

We develop a finite horizon continuous time market model, where risk averse investors maximize utility from terminal wealth by dynamically investing in a risk-free money market account, a stock, and a defaultable bond, whose prices are determined via equilibrium. We analyze the endogenous interaction arising between the stock and the defaultable bond via the interplay between equilibrium behavi...

Reduced-form models have proven to be a useful tool for analyzing the dynamics of credit spreads. However, some have recently questioned their ability to match the level of empirical default correlation. The key concern appears to be the assumption that defaults are independent conditional on the state variables driving the default intensity. In this paper, I use a “thought experiment” as well ...

Using sovereign CDS spreads and currency option data for Mexico and Brazil, we document that CDS spreads covary with both the currency option implied volatility and the slope of the implied volatility curve in moneyness. We propose a joint valuation framework, in which currency return variance and sovereign default intensity follow a bivariate diffusion with contemporaneous correlation. Estimat...

We propose a unified framework for equity and credit risk modeling, where the default time is a doubly stochastic random time with intensity driven by an underlying affine factor process. This approach allows for flexible interactions between the defaultable stock price, its stochastic volatility and the default intensity, while maintaining full analytical tractability. We characterise all risk...

Copula functions have become standard practice for pricing multi-name credit derivatives. Marginal default distributions are often chosen by using a simple deterministic intensity function. It is wellknown that this approach only generates default time correlation and, apart from jumps due to default events, does not generate correlation between the conditional default intensities, or the condi...

This paper presents a theoretical model of default risk in the context of the ``market'' model approach to interest rate dynamics. We propose a model for ®nite-interval interest rates (such as LIBOR) which explicitly takes into account the possibility of default through the in ̄uence of a point process with deterministic intensity. We relate the defaultable interest rate to the non-defaultable i...