This paper provides a Markov Model for the term structure of credit risk spreads. The model is based on Jarrow and Turnbull (1995) with the bankruptcy process following a discrete state space Markov chain in credit ratings. The parameters of this process are easily estimated using observable...

This paper provides a Markov model for the term structure of credit risk spreads. The model is based on Jarrow and Turnbull (1995) with the bankruptcy process following a discrete state space Markov chain in credit ratings. The parameters of this process are easily estimated using observable...

This paper provides a new methodology for pricing and hedging derivative securities involving credit risk. Two types of credit risks are considered. The first is where the asset underlying the derivative security may default. The second is where the writer of the derivative security may default....

The paper examines three equity-based structural models to study the nonlinear relationship between equity and credit default swap (CDS) prices. These models differ in the specification of the default barrier. With cross-firm CDS premia and equity information, we are able to estimate and compare...

A European interest rate digital call (put) option pays one dollar at maturity if the prespecified reference interest rate is above (below) the strike level, and zero otherwise. A European range digital option pays one dollar if the prespecified reference interest rate lies within a specified...

This paper provides an analytical and practical framework, consistent with maximizing the wealth of existing shareholders, to address the following questions:What are the costs associated with economic capital?What is the tradeoff between the probability of default and the costs of economic...

This paper formally incorporates parameter uncertainty and model error into the estimation of contingent claim models and the formulation of forecasts. This allows inference on functions of interest (option values, bias functions, hedge ratios) consistent with uncertainty in both parameters and...

Although relatively obscure, the market for distressed real estate tax liens exists in over 30 U.S. states, with a market size estimated to be around 20 billion dollars. While this niche asset class is relatively unknown to academics, internet advertising hypes tax liens to the populace as...

Motivated by recent financial crises in East Asia and the U.S. where the downfall of a small number of firms had an economy-wide impact, this paper generalizes existing reduced-form models to include default intensities dependent on the default of a counterparty. In this model, firms have...

The Black-Scholes formula is the quot;industry standardquot; for pricing options on a variety of instruments. This paper shows that even when markets are incomplete, the Black- Scholes option pricing formula can arise in an equilibrium merely from self-fulfilling beliefs that it is the correct...