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

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2008-07-23
  • Publisher: McGraw-Hill Education
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The world's leading financial thinkers share their insights into the latest developments in credit derivativesIn The Credit Derivatives Handbook, some of the world's sharpest financial and legal minds come together to discuss how credit derivatives have evolved from tools restricted to the banking industry into flexible and customizable instruments used by investors of all kinds.You will come away with the knowledge and insight needed to measure and value risk, as well as the ability to put credit derivatives to work. Over fifteen contributors provide in-depth analyses of subjects in their respective areas of expertise, such as: Key products, applications, and typical trades, hedging and credit structuring Pricing of credit default swaps and synthetic CDOs Design of synthetic CDOs Copula models, with illustrative examples Credit derivatives in investment portfolios Opportunities for structuring credit derivatives in accordance with Islamic financeComprehensive in scope but executed in meticulous detail,The Credit Derivatives Handbookprovides a complete, global perspective of what the editors consider "one of the most important financial innovations of recent times."

Author Biography

Greg N. Gregoriou is Professor of Finance in theSchool of Business and Economics at State University of New York.

Paul Ali is an Associate Professorin the Faculty of Law, University of Melbourne.

Table of Contents

Acknowledgmentsp. xi
Editorsp. xiii
Contributorsp. xv
Innovations in Credit Default Swaps
The Changing Face of Credit Default Swapsp. 3
Introductionp. 3
Credit Default Swapsp. 4
Referencesp. 12
Derivatives in Islamic Financep. 15
Introductionp. 16
Types of Islamic Financep. 17
Implicit Derivatives: Identification and Evaluationp. 22
Islamic Finance and Structured Financep. 31
Explicit Derivatives in Islamic Structured Finance: Credit Risk Transferp. 33
Assessment of Derivatives in Islamic Financep. 37
Conclusion: The Prospects of Islamic Derivativesp. 43
Acknowledgmentsp. 45
Referencesp. 45
Credit Derivatives and the Resolution of Financial Distressp. 47
Introductionp. 47
Chapter 11 Todayp. 48
Credit Derivatives and the Prebankruptcy Periodp. 49
Credit Derivatives in Chapter 11p. 52
Conclusionp. 55
Referencesp. 55
Asymmetric Information and Opacity in Credit Derivatives Marketsp. 57
Introductionp. 57
Related Literaturep. 60
The Modelp. 62
Asymmetric Informationp. 65
A Simple Model with Moral Hazard and Adverse Selectionp. 68
Conclusionp. 70
Appendixp. 71
Referencesp. 75
The Role of Macro and Country-Specific Factors on the Use of Credit Derivatives: Sovereign Credit Default Swap Marketp. 77
Introductionp. 77
Credit Derivatives: A Brief Overviewp. 78
An Emerging Market Overview: Turkeyp. 82
Data and Methodologyp. 85
Estimation Resultsp. 87
Conclusionp. 89
Referencesp. 90
Pricing Credit Default Swaps
Pricing Credit Derivatives with a Copula-Based Actuarial Model for Credit Riskp. 95
Introductionp. 95
The Model for Default and Credit Migrationp. 97
Credit Derivativesp. 104
Conclusionp. 116
Referencesp. 117
Asset Dynamics Estimation and Its Impact on CDS Pricingp. 121
Introductionp. 122
No-Arbitrage Pricing of CDSp. 123
The Structural Model of Credit Riskp. 125
Estimation of Asset Value Dynamicsp. 127
Empirical Impactp. 129
Analysis of the Pricing Errorp. 136
Conclusionp. 140
Referencesp. 141
A Unified Approach to the Theory of Default Risk and Credit Derivativesp. 143
Introductionp. 143
A Simple Model of Credit Riskp. 145
Normal Events and Rare Eventsp. 147
The Poisson Distributionp. 149
Credit Risk in the Framework of the B&S Differential Equationp. 150
The Merton Model and its Extensionsp. 151
Dynamic Modeling of the Probability of Default: The Probabilities of Transitionp. 163
Credit Derivativesp. 169
Other Approaches to Credit Riskp. 178
Conclusionp. 178
Referencesp. 179
Investigating the Link between Credit Default Swap Spreads and the U.S. Financial Marketp. 183
Introductionp. 183
Data Setp. 185
Econometric Studyp. 189
Investigating a Joint Evolutionp. 194
Linear Frameworkp. 194
Conclusionp. 198
Referencesp. 198
Design and Pricing of Collateralized Debt Obligations
Design of Collateralized Debt Obligations: The Impact of Target Ratings on the First Loss Piecep. 203
Introductionp. 203
Collateralized Debt Obligationsp. 204
Information Asymmetries in CDO Transactionsp. 212
Portfolio Construction and the Size of the First Loss Piecep. 217
Conclusionp. 226
Referencesp. 226
On the Pricing of Collateralized Debt Obligationsp. 229
Introductionp. 229
Portfolio Credit Derivativesp. 231
Model and Applicationsp. 235
Conclusionp. 246
Appendixp. 246
Referencesp. 257
Pricing Forward-Starting Collateralized Debt Obligations Using Dynamic Copula Processesp. 259
Introductionp. 260
Archimedean Copulas within the Credit Frameworkp. 263
Dynamic Copulas from a Levy Process Perspectivep. 268
Dynamic Copulas Based on Gamma-OU Processp. 273
Comparing the Two Dynamic Copula Modelsp. 278
Conclusionp. 278
p. 282
Simulating the Gamma-OU Processp. 285
Referencesp. 286
Identifying Systemic and Idiosyncratic Risk from Standardized Single-Tranche Collateralized Debt Obligationsp. 289
Introductionp. 289
A Brief Primer on CDOsp. 291
Default Probability and Default Correlation in STCDOsp. 294
Idiosyncratic and Systemic Risk in STCDO Tranchesp. 297
Data and Empirical Frameworkp. 297
Resultsp. 299
Conclusionp. 301
Referencesp. 302
Default Contagion in Large Homogeneous Portfoliosp. 303
Introductionp. 304
Intensity-Based Models in a Homogeneous Model Reinterpreted as Markov Jump Processesp. 305
Using the Matrix-Analytic Approach to Find Multivariate Default Distributions and Related Quantitiesp. 306
Calibrating the Model Parameters against CDO Tranche Spreads, Index CDS Spreads, and Average CDS Spreadsp. 316
Numerical Studiesp. 320
Conclusionp. 330
Acknowledgmentsp. 332
Referencesp. 332
Asset Allocation and Credit Derivatives
An Asset Allocation Problem with Credit Derivativesp. 337
Introductionp. 337
The Modelp. 339
The Optimal Portfoliop. 348
Conclusionp. 355
Appendixp. 355
Referencesp. 358
Synthetic Collateralized-Debt-Obligation-Squared Pricing Methodologiesp. 361
Introductionp. 362
Synthetic CDO-Squared Structuresp. 364
Synthetic CDO-Squared Pricingp. 365
Conclusionp. 374
Referencesp. 376
The Role of Credit and Credit Index Derivatives in Portfolio Management: Asset Allocation Issues and Opportunitiesp. 379
Introductionp. 379
Credit Market Performancep. 380
The Role of Riskier Credit in Investment Portfoliosp. 383
Using Index Derivatives to Alter Portfolio Asymmetry Propertiesp. 385
Allocation via Active Rulesp. 389
Conclusionp. 393
Referencesp. 393
Indexp. 397
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