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Credit Derivatives in an Affine Framework

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Author Info

  • Li Chen

    (Princeton University)

  • Damir Filipovic

    (Princeton University)

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Abstract

We develop a general and efficient method for valuating credit derivatives based on multiple entities in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of multiple firms. As an application we provide closed form expressions for the joint distribution of default times, default correlations, and credit default spreads in the presence of counterparty default risk.

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File URL: http://128.118.178.162/eps/fin/papers/0307/0307002.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Finance with number 0307002.

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Length: 21 pages
Date of creation: 04 Jul 2003
Date of revision:
Handle: RePEc:wpa:wuwpfi:0307002

Note: Type of Document - pdf; prepared on IBM PC - PC; to print on HP/PostScript/Franciscan monk; pages: 21 ; figures: none. We never published this piece and now we would like to reduce our mailing and xerox cost by posting it.
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Web page: http://128.118.178.162

Related research

Keywords: credit derivatives; joint default correlation; affine models;

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References

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  1. 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.
  2. Darrell Duffie & Jun Pan & Kenneth Singleton, 1999. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," NBER Working Papers 7105, National Bureau of Economic Research, Inc.
  3. Kenneth J. Singleton & Len Umantsev, 2002. "Pricing Coupon-Bond Options And Swaptions In Affine Term Structure Models," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 427-446.
  4. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
  5. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, EconWPA.
  6. Robert A. Jarrow, 2001. "Counterparty Risk and the Pricing of Defaultable Securities," Journal of Finance, American Finance Association, vol. 56(5), pages 1765-1799, October.
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Cited by:
  1. Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos-Sklibosios, 2011. "Credit Derivative Pricing with Stochastic Volatility Models," Research Paper Series 293, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Li Chen & H. Vincent Poor, 2003. "Credit Risk Modeling and the Term Structure of Credit Spreads," Finance 0312009, EconWPA.

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