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Table Of Contents

Structural Approach
1.1 Notation and Definitions
1.1.1 Defaultable Claims
1.1.2 Risk-Neutral Valuation Formula
1.1.3 Defaultable Zero-Coupon Bond
1.2 Merton’s Model
1.3 First Passage Times
1.3.1 Distribution of the First Passage Time
1.3.2 Joint Distribution of Y and τ
1.4.1 Bond Valuation
1.4.2 Black and Cox Formula
1.4.3 Corporate Coupon Bond
1.4.4 Optimal Capital Structure
1.5 Extensions of the Black and Cox Model
1.5.1 Stochastic Interest Rates
1.6 Random Barrier
1.6.1 Independent Barrier
Hazard Function Approach
2.1 Elementary Market Model
2.1.1 Hazard Function and Hazard Rate
2.1.2 Defaultable Bond with Recovery at Maturity
2.1.3 Defaultable Bond with Recovery at Default
2.2 Martingale Approach
2.2.1 Conditional Expectations
2.2.2 Martingales Associated with Default Time
2.2.3 Predictable Representation Theorem
2.2.4 Girsanov’s Theorem
2.2.7 Price Dynamics of Simple Defaultable Claims
2.3 Pricing of General Defaultable Claims
2.3.1 Buy-and-Hold Strategy
2.3.2 Spot Martingale Measure
2.3.3 Self-Financing Trading Strategies
2.3.4 Martingale Properties of Arbitrage Prices
2.4 Single Name Credit Derivatives
2.4.1 Stylized Credit Default Swap
2.4.2 Market CDS Spread
2.4.3 Price Dynamics of a CDS
2.4.4 Replication of a Defaultable Claim
2.5 Basket Credit Derivatives
2.5.1 First-to-Default Intensities
2.5.2 First-to-Default Representation Theorem
2.5.3 Price Dynamics of Credit Default Swaps
2.5.4 Valuation of a First-to-Default Claim
2.5.5 Replication of a First-to-Default Claim
2.5.6 Conditional Default Distributions
2.5.7 Recursive Valuation of a Basket Claim
2.5.8 Recursive Replication of a Basket Claim
2.6 Applications to Copula-Based Models
2.6.1 Independent Default Times
2.6.2 Archimedean Copulae
Hazard Process Approach
3.1 Hazard Process and its Applications
3.1.1 Conditional Expectations
3.1.2 Hazard Rate
3.1.3 Valuation of Defaultable Claims
3.1.4 Defaultable Bonds
3.1.5 Martingales Associated with Default Time
3.1.6 F-Intensity of Default Time
3.1.7 Reduction of the Reference Filtration
3.1.8 Enlargement of Filtration
3.2 Hypothesis (H)
3.2.1 Equivalent Forms of Hypothesis (H)
3.2.2 Canonical Construction of a Default Time
3.2.3 Stochastic Barrier
3.3 Predictable Representation Theorem
3.4 Girsanov’s Theorem
3.5 Invariance of Hypothesis (H)
3.5.1 Case of the Brownian Filtration
3.5.2 Extension to Orthogonal Martingales
3.6 G-Intensity of Default Time
3.7 Single Name CDS Market
3.7.1 Standing Assumptions
3.7.2 Valuation of a Defaultable Claim
3.7.3 Replication of a Defaultable Claim
3.8.1 Valuation of a First-to-Default Claim
3.8.2 Replication of a First-to-Default Claim
Hedging of Defaultable Claims
4.1 Semimartingale Market Model
4.1.1 Dynamics of Asset Prices
4.2 Trading Strategies
4.2.1 Unconstrained Strategies
4.2.2 Constrained Strategies
4.3.1 Defaultable Asset with Zero Recovery
4.3.2 Hedging with a Defaultable Bond
4.3.3 Defaultable Asset with Non-Zero Recovery
4.3.4 Two Defaultable Assets with Zero Recovery
4.4 PDE Approach
4.4.1 Defaultable Asset with Zero Recovery
4.4.2 Defaultable Asset with Non-Zero Recovery
4.4.3 Two Defaultable Assets with Zero Recovery
Modeling Dependent Defaults
5.1 Basket Credit Derivatives
5.1.1 The kth-to-Default Contingent Claims
5.1.2 Case of Two Credit Names
5.2. CONDITIONALLY INDEPENDENT DEFAULTS 171
5.2 Conditionally Independent Defaults
5.2.1 Canonical Construction
5.2.2 Hypothesis (H)
5.2.3 Independent Default Times
5.2.4 Signed Intensities
5.3 Valuation of FTDC and LTDC
5.4 Copula-Based Approaches
5.4.1 Direct Approach
5.4.2 Indirect Approach
5.5. ONE-FACTOR GAUSSIAN COPULA MODEL 177
5.5 One-factor Gaussian Copula Model
5.6 Jarrow and Yu Model
5.6.1 Construction of Default Times
5.6.2 Case of Two Credit Names
5.7 Kusuoka’s Model
5.7.1 Model Specification
5.7.2 Bonds with Zero Recovery
5.8 Basket Credit Derivatives
5.8.1 Credit Default Index Swaps
5.8.2 Collateralized Debt Obligations
5.8.3 First-to-Default Swaps
5.8.4 Step-up Corporate Bonds
5.8.5 Valuation of Basket Credit Derivatives
5.9 Modeling of Credit Ratings
5.9.1 Infinitesimal Generator
5.9.2 Transition Intensities for Credit Ratings
5.9.3 Conditionally Independent Credit Migrations
5.9.4 Examples of Markovian Models
5.9.5 Forward Credit Default Swap
5.9.6 Credit Default Swaptions
5.9.7 Spot kth-to-Default Credit Swap
5.9.8 Forward kth-to-Default Credit Swap
5.9.9 Model Implementation
Poisson Processes
A.1 Standard Poisson Process
A.2 Inhomogeneous Poisson Process
A.3 Conditional Poisson Process
A.4 The Dol´eans Exponential
A.4.1 Exponential of a Process of Finite Variation
A.4.2 Exponential of a Special Semimartingale
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Credit Risk Modeling Notes

Credit Risk Modeling Notes

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Published by: vk_in81 on Jul 18, 2012
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