The implementation of credit risk models has largely relied on the use of historical default dependence, as proxied by the correlation of equity returns. However, as is well known, credit derivative pricing requires risk-neutral dependence. Using the copula methodology, we infer risk neutral...

The paper presents an overview of financial applications of copulas. Copulas permit to represent joint distribution functions by splitting the marginal behavior, embedded in the marginal distributions, from the dependence, captured by the copula itself. The splitting proves to be very helpful...

In this paper, we propose a multivariate financial model for nancial assets which incorporates jumps, skewness, kurtosis and stochastic volatility, and discuss its applications in the context of equity and credit risk. In the former case we describe the stochastic behavior of a series of stocks...

In this note we use doubly stochastic processes (or Cox processes) in order to model the evolution of the stochastic force of mortality of an individual aged x. These processes have been widely used in the credit risk literature in modelling the default arrival, and in this context have proved...

In this paper we apply a copula function pricing technique to the evaluation of credit derivatives, namely a vulnerable default put option and a credit switch. Also in this case, copulas enable to separate the specification of marginal default probabilities from their dependence structure. Their...

In this paper we apply a copula function pricing technique to the evaluation of vulnerable options, i.e. options with counterpart risk. Using copulas enables to separate the specification of marginal distributions and the dependence structure of the events of exercise of the option and default...

This paper studies Value at Risk (VaR) bounds for sums of stochastically dependent random variables, i.e. portfolios of correlated financial assets. The bounds hold under no restrictions on the dependence or on the marginal distributions of returns. An improvement of the bounds is given for...

In this paper we suggest the adoption of copula functions in order to price multivariate contingent claims. Copulas enable us to imbed the marginal distributions extracted from vertical spreads in the options markets in a multivariate pricing kernel. We prove that such kernel is a copula...

This paper explores the relationship between optimal leverage and credit risk under ownership links. It develops a structural model of a parent and a subsidiary, which issues debt in its own name under a guarantee by the parent. We find that zero leverage can be optimal for the guarantor, while...

The issue of model risk in default modeling has been known since inception of the Academic literature in the field. However, a rigorous treatment requires a description of all the possible models, and a measure of the distance between a single model and the alternatives, consistent with the...