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Credit Derivatives in an Affine Framework

Author

Listed:
  • Li Chen

    (Princeton University)

  • Damir Filipovic

    (Princeton University)

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.

Suggested Citation

  • Li Chen & Damir Filipovic, 2003. "Credit Derivatives in an Affine Framework," Finance 0307002, EconWPA.
  • 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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    References listed on IDEAS

    as
    1. Li Chen & Damir Filipovic, 2003. "A Simple Model for Credit Migration and Spread Curves," Finance 0305003, EconWPA.
    2. 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.
    3. Darrell Duffie & Jun Pan & Kenneth Singleton, 2000. "Transform Analysis and Asset Pricing for Affine Jump-Diffusions," Econometrica, Econometric Society, vol. 68(6), pages 1343-1376, November.
    4. 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 449-470, May.
    5. Robert A. Jarrow, 2009. "Credit Risk Models," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 37-68, November.
    6. Robert A. Jarrow & Fan Yu, 2008. "Counterparty Risk and the Pricing of Defaultable Securities," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 20, pages 481-515 World Scientific Publishing Co. Pte. Ltd..
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. repec:wsi:ijtafx:v:16:y:2013:i:04:n:s0219024913500192 is not listed on IDEAS
    2. Li Chen & H. Vincent Poor, 2003. "Credit Risk Modeling and the Term Structure of Credit Spreads," Finance 0312009, EconWPA.
    3. Carl Chiarella & Samuel Chege Maina & Christina Nikitopoulos Sklibosios, 2013. "Credit Derivatives Pricing With Stochastic Volatility Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 16(04), pages 1-28.
    4. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5.

    More about this item

    Keywords

    credit derivatives; joint default correlation; affine models;

    JEL classification:

    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other

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