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Implied Default Probability and Credit Derivatives

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  • Koichi Matsumoto

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    Abstract

    Recently many kinds of credit derivatives are traded in the market. The default probability implied in the market becomes important to price some credit derivatives. Also it is useful for managing the credit risk because it includes the market information. In this paper we show how to calculate the implied default probability in the default swap market or the defaultable bond market. Copyright Springer Science + Business Media, Inc. 2003

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    File URL: http://hdl.handle.net/10.1007/s10690-005-6007-z
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    Bibliographic Info

    Article provided by Springer in its journal Asia-Pacific Financial Markets.

    Volume (Year): 10 (2003)
    Issue (Month): 2 (September)
    Pages: 129-149

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    Handle: RePEc:kap:apfinm:v:10:y:2003:i:2:p:129-149

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    Web page: http://springerlink.metapress.com/link.asp?id=102851

    Related research

    Keywords: implied default probability; forward measure; default swap; credit spread option; defaultable bond;

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    1. Robert Jarrow & Dilip Madan, 1995. "Option Pricing Using The Term Structure Of Interest Rates To Hedge Systematic Discontinuities In Asset Returns," Mathematical Finance, Wiley Blackwell, vol. 5(4), pages 311-336.
    2. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    3. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-70, May.
    4. Jarrow, Robert A & Lando, David & Turnbull, Stuart M, 1997. "A Markov Model for the Term Structure of Credit Risk Spreads," Review of Financial Studies, Society for Financial Studies, vol. 10(2), pages 481-523.
    5. Heath, David & Jarrow, Robert & Morton, Andrew, 1992. "Bond Pricing and the Term Structure of Interest Rates: A New Methodology for Contingent Claims Valuation," Econometrica, Econometric Society, vol. 60(1), pages 77-105, January.
    6. Robert A. Jarrow, 2009. "The Term Structure of Interest Rates," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 69-96, November.
    7. Jarrow, Robert A & Turnbull, Stuart M, 1995. " Pricing Derivatives on Financial Securities Subject to Credit Risk," Journal of Finance, American Finance Association, vol. 50(1), pages 53-85, March.
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