Credit Derivatives Handbook: Global Perspectives, Innovations, and Market Drivers Book

Acknowledgments     xi
Editors     xiii
Contributors     xv
Innovations in Credit Default Swaps
The Changing Face of Credit Default Swaps   Paul U. Ali   Jan Job de Vries Robbe     3
Introduction     3
Credit Default Swaps     4
References     12
Derivatives in Islamic Finance   Andreas A. Jobst     15
Introduction     16
Types of Islamic Finance     17
Implicit Derivatives: Identification and Evaluation     22
Islamic Finance and Structured Finance     31
Explicit Derivatives in Islamic Structured Finance: Credit Risk Transfer     33
Assessment of Derivatives in Islamic Finance     37
Conclusion: The Prospects of Islamic Derivatives     43
Acknowledgments     45
References     45
Credit Derivatives and the Resolution of Financial Distress   Stephen J. Lubben     47
Introduction     47
Chapter 11 Today     48
Credit Derivatives and the Prebankruptcy Period     49
Credit Derivatives in Chapter 11     52
Conclusion     55
References     55
Asymmetric Information andOpacity in Credit Derivatives Markets   Antonio Nicolo   Loriana Pelizzon     57
Introduction     57
Related Literature     60
The Model     62
Asymmetric Information     65
A Simple Model with Moral Hazard and Adverse Selection     68
Conclusion     70
Appendix     71
References     75
The Role of Macro and Country-Specific Factors on the Use of Credit Derivatives: Sovereign Credit Default Swap Market   Mehmet Orhan   M. Nihat Solakoglu     77
Introduction     77
Credit Derivatives: A Brief Overview     78
An Emerging Market Overview: Turkey     82
Data and Methodology     85
Estimation Results     87
Conclusion     89
References     90
Pricing Credit Default Swaps
Pricing Credit Derivatives with a Copula-Based Actuarial Model for Credit Risk   Giovanni Masala   Massimiliano Menzietti   Marco Micocci     95
Introduction     95
The Model for Default and Credit Migration     97
Credit Derivatives     104
Conclusion     116
References     117
Asset Dynamics Estimation and Its Impact on CDS Pricing   Pascal Francois   Georges Hubner     121
Introduction     122
No-Arbitrage Pricing of CDS     123
The Structural Model of Credit Risk     125
Estimation of Asset Value Dynamics     127
Empirical Impact     129
Analysis of the Pricing Error     136
Conclusion     140
References     141
A Unified Approach to the Theory of Default Risk and Credit Derivatives   Francois-Eric Racicot   Raymond Theoret     143
Introduction     143
A Simple Model of Credit Risk     145
Normal Events and Rare Events     147
The Poisson Distribution     149
Credit Risk in the Framework of the B&S Differential Equation     150
The Merton Model and its Extensions     151
Dynamic Modeling of the Probability of Default: The Probabilities of Transition     163
Credit Derivatives     169
Other Approaches to Credit Risk     178
Conclusion     178
References     179
Investigating the Link between Credit Default Swap Spreads and the U.S. Financial Market   Hayette Gatfaoui     183
Introduction      183
Data Set     185
Econometric Study     189
Investigating a Joint Evolution     194
Linear Framework     194
Conclusion     198
References     198
Design and Pricing of Collateralized Debt Obligations
Design of Collateralized Debt Obligations: The Impact of Target Ratings on the First Loss Piece   Marc Gurtler   Martin Hibbeln   Sven Olboeter     203
Introduction     203
Collateralized Debt Obligations     204
Information Asymmetries in CDO Transactions     212
Portfolio Construction and the Size of the First Loss Piece     217
Conclusion     226
References     226
On the Pricing of Collateralized Debt Obligations   Raquel M. Gaspar   Thorsten Schmidt     229
Introduction     229
Portfolio Credit Derivatives     231
Model and Applications     235
Conclusion     246
Appendix     246
References     257
Pricing Forward-Starting Collateralized Debt Obligations Using Dynamic Copula Processes   Daniel Totouom   Margaret Armstrong     259
Introduction     260
Archimedean Copulas within the Credit Framework     263
Dynamic Copulas from a Levy Process Perspective     268
Dynamic Copulas Based on Gamma-OU Process     273
Comparing the Two Dynamic Copula Models     278
Conclusion     278
Appendix 1     282
Simulating the Gamma-OU Process     285
References     286
Identifying Systemic and Idiosyncratic Risk from Standardized Single-Tranche Collateralized Debt Obligations   Jorge A. Chan-Lau   Yinqiu Lu     289
Introduction     289
A Brief Primer on CDOs     291
Default Probability and Default Correlation in STCDOs     294
Idiosyncratic and Systemic Risk in STCDO Tranches     297
Data and Empirical Framework     297
Results     299
Conclusion     301
References     302
Default Contagion in Large Homogeneous Portfolios   Alexander Herbertsson     303
Introduction     304
Intensity-Based Models in a Homogeneous Model Reinterpreted as Markov Jump Processes     305
Using the Matrix-Analytic Approach to Find Multivariate Default Distributions and Related Quantities     306
Calibrating the Model Parameters against CDO Tranche Spreads, Index CDS Spreads, and Average CDS Spreads     316
Numerical Studies     320
Conclusion     330
Acknowledgments     332
References     332
Asset Allocation and Credit Derivatives
An Asset Allocation Problem with Credit Derivatives   Francesco Menoncin     337
Introduction     337
The Model     339
The Optimal Portfolio     348
Conclusion     355
Appendix     355
References     358
Synthetic Collateralized-Debt-Obligation-Squared Pricing Methodologies   Dominique Guegan   Julien P. Houdain     361
Introduction     362
Synthetic CDO-Squared Structures     364
Synthetic CDO-Squared Pricing     365
Conclusion     374
References     376
The Role of Credit and Credit Index Derivatives in Portfolio Management: Asset Allocation Issues and Opportunities   R. McFall Lamm, Jr.     379
Introduction     379
Credit Market Performance     380
The Role of Riskier Credit in Investment Portfolios     383
Using Index Derivatives to Alter Portfolio Asymmetry Properties     385
Allocation via Active Rules      389
Conclusion     393
References     393
Index     397