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Advanced Credit Portfolio Modeling and CDO Pricing

In: Mathematics – Key Technology for the Future

Author

Listed:
  • Ernst Eberlein

    (University of Freiburg, Department of Mathematical Stochastics)

  • Rüdiger Frey

    (University of Leipzig, Department of Mathematics)

  • Ernst August von Hammerstein

    (University of Freiburg, Department of Mathematical Stochastics)

Abstract

Credit risk represents by far the biggest risk in the activities of a traditional bank. In particular, during recession periods financial institutions loose enormous amounts as a consequence of bad loans and default events. Traditionally the risk arising from a loan contract could not be transferred and remained in the books of the lending institution until maturity. This has changed completely since the introduction of credit derivatives such as credit default swaps (CDSs) and collaterized debt obligations (CDOs) roughly fifteen years ago. The volume in trading these products at the exchanges and directly between individual parties (OTC) has increased enormously. This success is due to the fact that credit derivatives allow the transfer of credit risk to a larger community of investors. The risk profile of a bank can now be shaped according to specified limits, and concentrations of risk caused by geographic and industry sector factors can be reduced.

Suggested Citation

  • Ernst Eberlein & Rüdiger Frey & Ernst August von Hammerstein, 2008. "Advanced Credit Portfolio Modeling and CDO Pricing," Springer Books, in: Hans-Joachim Krebs & Willi Jäger (ed.), Mathematics – Key Technology for the Future, pages 253-279, Springer.
    • Handle: RePEc:spr:sprchp:978-3-540-77203-3_17
    DOI: 10.1007/978-3-540-77203-3_17
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