The Basel II Accord requires banks to establish rigorous statistical procedures for the estimation and validation of default and ratings transition probabilities. This raises great technical challenges when sufficient default data are not available, as is the case for low default portfolios. We...

Taking the term structure of Treasury securities and Eurodollar rates as exogenous, this paper provides an integrated approach to the pricing and hedging of LIBOR derivatives. Our approach allows the spread between Eurodollar and Treasury rates to reflect both the credit risk in holding...

In this paper, we focus on modeling and predicting the loss distribution for credit risky assets such as bonds and loans. We model the probability of default and the recovery rate given default based on shared covariates. We develop a new class of default models that explicitly accounts for...

The paper describes a framework for delta and gamma hedging an interest rate portfolio using a multifactor form of the Heath et al. (1992) model. A formal description of bucket hedging is given along with a discussion of some of the issues surrounding the choice of bucket lengths. Given that a...

This review provides formal definitions of the terms credit value adjustment (CVA) and debt value adjustment (DVA). Estimating these quantities requires modeling the probabilities of default and the loss given default, recognizing the dependence structure among all these inputs. In practice,...

type="main" xml:lang="en" <p>This paper uses three basic results to address three problems. The first problem concerns the pricing of corporate bonds, when in the event of default the claim of the bond holders is on the principal of the bond plus accrued interest. The second concerns the pricing of...</p>

type="main" xml:lang="en" <p>Given the objective of maximizing the wealth of existing shareholders, this paper discusses some of the issues that arise in attempting to measure the performance of individual businesses within a bank. The paper describes two return measures – return on assets within...</p>

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...