In this paper a new credit risk model for credit derivatives is presented. The model is based upon the ‘Libor market’ modelling framework for default-free interest rates. We model effective default-free forward rates and effective forward credit spreads as lognormal diffusion processes, and recovery is modelled as a fraction of the par value of the defaulted claim. The newly introduced survival...

In this paper we present a model for the dynamic evolution of the term structure of default-free and defaultable interest rates. The model is set in the Libor market model framework but in contrast to the classical diffusion-driven setup, its dynamics are driven by a time-inhomogeneous Lévy process which allows us to better capture the real-world dynamics of credit spreads. We present necessary...

The market for interest rate swaps has grown consistently since its inception. Swaps involve “swapping” fixed interest rate debt for variable rate debt. We explain this growth using a game theoretic model. We focus on managerial and owner compensation differences under swaps and open market restructuring. We conclude that swaps occur because the swap market incorporates information about the fi...

In this paper, we consider the hedging of portfolio loss derivatives using single-name credit default swaps as hedging instruments. The hedging issue is investigated in a general pure jump dynamic setting where default times are assumed to admit a joint density. In a first step, we compute default intensities adapted to the global filtration of defaults. In particular, we stress the impact of a...

Using the reduced form framework with inter-dependent default correlation, we perform valuation of credit default swap with counterparty risk. The inter-dependent default risk structure between the protection buyer, protection seller and the reference entity in a credit default swap are characterized by their correlated default intensities, where the default intensity of one party increases whe...

This paper presents a new structural framework for multidimensional default risk. We define the time of default as the first time the log-return of the stock price of a firm jumps below a (possibly nonconstant) default level. When stock prices are exponential Lévy, this framework is equivalent to a reduced form approach, where the intensity process is parametrized by a Lévy measure. The depende...