Credit risk is the major challenge for risk managers and market regulators. Banks, regulators and central banks do not agree on how to measure credit risk and, more particularly, on how to compute the optimal capital that is necessary for protecting the different partners that share this risk....

We tweak the conventional Merton model to account for the asymmetric properties of assets returns and investors asymmetric behavior toward the upside potential of gain versus the downside risk of loss. Using an asymmetric split normal distribution, we capture empirical asymmetries in the...

During the past forty years, the simultaneous, symbiotic growth of financial innovation, disintermediation and deregulation has created an environment with extremely complex, opaque investment instruments. That system has now collapsed. At the very center of the crisis are a small group of...

Recently there has been some interest in the credit risk literature in models which involve stopping times related to excursions. The classical Black-Scholes-Merton-Cox approach postulates that default may occur, either at or before maturity, when the firm's value process falls below a critical...

In this notice we are comment popular approaches to the credit risk modeling.

Recently, banking literature has had a quest for appropriate pricing of bank loans under the new Basel II rules and has been in pursuit of possible outcomes for undertaking such credit risk. In this paper, we propose a simplified formula to price bank's corporate loans, aiming at making bank...

We analyze corporate financial policies in leveraged buyouts (LBOs) in the presence of default risk. Our model captures the LBO-specific stepwise debt reduction, either with predetermined or cash-flow dependent (cash sweep) principal payments, and thus allows for dynamic redemption. These...

We consider risk-neutral valuation of a contingent claim under bilateral counterparty risk in a reduced-form setting similar to that of Duffie and Huang [1996] and Duffie and Singleton [1999]. The probabilistic valuation formulas derived under this framework cannot be usually used for practical...

We introduce Dirac processes, using Dirac delta functions, for short-rate-type pricing of financial derivatives. Dirac processes add spikes to the existing building blocks of diffusions and jumps. Dirac processes are Generalized Processes, which have not been used directly before because the...

We study the impact of wrong-way-risk (WWR) on credit valuation adjustment (CVA) for European and Bermudan options, based on an intensity model. WWR is modeled by a dependency between the underlying asset and the intensity of the counterparty's default. We consider three different models. We...