When the financial crisis started in 2007 and exploded in 2008, markets experienced one of the most severe shocks ever. During this time, it became clear that there were some serious problems with credit risk modeling in general and credit derivatives in particular.
In the wake of this event, many involved in this field were left asking: What issues and challenges should be addressed? And what lessons can be learned from the credit mess? Credit Risk Frontiers offers answers to these and other questions by presenting the latest research in this field and examining important issues exposed by the financial crisis.
PRAISE FOR CREDIT RISK FRONTIERS
"The role of credit derivatives in the current financial crisis has been widely discussed by regulators, investors, academics, and the general public. In this comprehensive book, the editors put together an impressive array of contributions written by the well–known experts in the field. It would be helpful to anyone who wants to understand the theoretical and practicalaspects of credit derivatives and their role in the broader financial context. I recommend it highly."
Professor Alexander Lipton, Co–head of the Global Quantitative Group, Bank of America Merrill Lynch and Visiting Professor, Imperial College
"This is a collection of papers dealing with credit risk modeling and credit derivatives with great clarity. The coverage is extensive, from expert opinions on the current credit crisis to cutting–edge research on the credit market, including the valuation of CVA and counterparty risk, which is one of the hottest issues in the current environment. The volume should be read not only by credit specialists but also academics and students in particular who wish to work in this area."
Masaaki Kijima, Graduate School of Economics, Kyoto University
Foreword ixGreg M.Gupton
Introduction 1Tomasz R. Bielecki, Damiano Brigo, and Frederic Patras
PART I: EXPERT VIEWS
CHAPTER 1 Origins of the Crisis and Suggestions for Further Research 7Jean–Pierre Lardy
CHAPTER 2 Quantitative Finance: Friend or Foe? 19Benjamin Herzog and Julien Turc
PART II: CREDIT DERIVATIVES: METHODS
CHAPTER 3 An Introduction to Multiname Modeling in Credit Risk 35Aurelien Alfonsi
CHAPTER 4 A Simple Dynamic Model for Pricing and Hedging Heterogeneous CDOs 71Andrei V. Lopatin
CHAPTER 5 Modeling Heterogeneity of Credit Portfolios: A Top–Down Approach 105Igor Halperin
CHAPTER 6 Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice 149Areski Cousin and Jean–Paul Laurent
CHAPTER 7 Filtering and Incomplete Information in Credit Risk 185Rudiger Frey and Thorsten Schmidt
CHAPTER 8 Options on Credit Default Swaps and Credit Default Indexes 219Marek Rutkowski
PART III: CREDIT DERIVATIVES: PRODUCTS
CHAPTER 9 Valuation of Structured Finance Products with Implied FactorModels 283Jovan Nedeljkovic, Dan Rosen, and David Saunders
CHAPTER 10 Toward Market–Implied Valuations of Cash–Flow CLO Structures 319Philippos Papadopoulos
CHAPTER 11 Analysis of Mortgage–Backed Securities: Before and After the Credit Crisis 345Harvey J. Stein, Alexander L. Belikoff, Kirill Levin, and Xusheng Tian
PART IV: COUNTERPARTY RISK PRICING AND CREDIT VALUATION ADJUSTMENT
CHAPTER 12 CVA Computation for Counterparty Risk Assessment in Credit Portfolios 397Samson Assefa, Tomasz R. Bielecki, Stephane Crepey, and Monique Jeanblanc
CHAPTER 13 Structural Counterparty Risk Valuation for Credit Default Swaps 437Christophette Blanchet–Scalliet and Frederic Patras
CHAPTER 14 Credit Calibration with Structural Models and Equity Return Swap Valuation under Counterparty Risk 457Damiano Brigo, Massimo Morini, and Marco Tarenghi
CHAPTER 15 Counterparty Valuation Adjustments 485Harvey J. Stein and Kin Pong Lee
CHAPTER 16 Counterparty Risk Management and Valuation 507Michael Pykhtin
PART V: EQUITY TO CREDIT
CHAPTER 17 Pricing and Hedging with Equity–Credit Models 539Benjamin Herzog and Julien Turc
CHAPTER 18 Unified Credit–Equity Modeling 553Vadim Linetsky and Rafael Mendoza–Arriaga
PART VI: MISCELLANEA: LIQUIDITY, RATINGS, RISK CONTRIBUTIONS, AND SIMULATION
CHAPTER 19 Liquidity Modeling for Credit Default Swaps: An Overview 587Damiano Brigo, Mirela Predescu, and Agostino Capponi
CHAPTER 20 Stressing Rating Criteria Allowing for Default Clustering: The CPDO Case 619Roberto Torresetti and Andrea Pallavicini
CHAPTER 21 Interacting Path Systems for Credit Risk 649Pierre Del Moral and Frederic Patras
CHAPTER 22 Credit Risk Contributions 675Dan Rosen and David Saunders
Conclusion 721Tomasz R. Bielecki, Damiano Brigo, and Frederic Patras
Further Reading 725
About the Contributors 727
Damiano Brigo was recently appointed as Gilbart Professor of Financial Mathematics at King′s College, London, heading the research of the mathematicalfinance group. He has published more than fifty worksin top journals on mathematical finance, systemstheory, probability, and statistics; a book for Springer–Verlag that has become a field reference in stochasticinterest rate modeling; and a book for Wiley on creditmodels and the crisis. Brigo obtained a PhD in stochastic filtering with differential geometry in 1996 from the Free University of Amsterdam.
Frédéric Patras is Director of Research at the Centre National de la Recherche Scientifique (Université de Nice, France) and head of quantitative analysis at Zeliade Systems, a software and service provider for financial institutions. He studied at the école Normale Supérieure (Paris) and obtained a PhD in mathematics at the Université Paris 7 Denis Diderot. He has authored more than thirty research papers in combinatorics, mathematical physics, probability, statistics, and mathematical finance.