Revised standards for capital requirements for market risks in a bank's trading book have been issued as a result of the Fundamental Review of the Trading Book. Under the new standards, default risk needs to be measured and capitalized through a dedicated Default Risk Charge (DRC). While...

We review different theoretical and empirical approaches for measuring the impact of liquidity on CDS prices. We start by reduced form models incorporating liquidity as an additional discount rate. We review Chen, Fabozzi and Sverdlove (2008) and Buhler and Trapp (2006, 2008), adopting different...

A feature of credit markets is the large difference between probabilities of default calculated from historical data and probabilities of default implied from bond prices (or from credit default swaps). This paper illustrates and discusses the reasons for the difference between historical and...

A company's credit default swap spread is the cost per annum for protection against a default by the company. In this paper we analyze data on credit default swap spreads collected by a credit derivatives broker. We first examine the relationship between credit default spreads and bond yields...

This paper presents a semi-analytical approach for calculating the counterparty exposure of credit derivative contracts conditional on the default of the counterparty, based on a Merton-type asset return model. The approach provides an efficient algorithm for implementing large-scale exposure...

This paper compares a range of alternative approaches to incorporate Initial Margins (IMs) in the modelling of counterparty credit risk exposures. With the rise of Central Counterparties to clear OTC derivatives and the incoming legislation requiring bilateral margining for uncleared derivatives...