12. Dynamic Modeling of Credit Derivatives

  1. Daniel Rösch and
  2. Harald Scheule
  1. Alfred Hamerle,
  2. Kilian Plank and
  3. Christian Scherr

Published Online: 29 AUG 2013

DOI: 10.1002/9781118818503.ch12

Credit Securitizations and Derivatives: Challenges for the Global Markets

Credit Securitizations and Derivatives: Challenges for the Global Markets

How to Cite

Hamerle, A., Plank, K. and Scherr, C. (2013) Dynamic Modeling of Credit Derivatives, in Credit Securitizations and Derivatives: Challenges for the Global Markets (eds D. Rösch and H. Scheule), John Wiley & Sons Ltd, Chichester, UK. doi: 10.1002/9781118818503.ch12

Author Information

  1. University of Regensburg

Publication History

  1. Published Online: 29 AUG 2013
  2. Published Print: 12 APR 2013

ISBN Information

Print ISBN: 9781119963967

Online ISBN: 9781118818503

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Keywords:

  • credit default swaps (CDS);
  • empirical analysis;
  • modeling asset dynamics;
  • portfolio credit derivatives

Summary

This chapter provides a simple model with a small number of parameters and a high degree of analytical tractability for a general option-based pricing of credits derivatives. It focuses on the comprehensive and (semi-)analytical description of credit-related assets (firm values), as well as corresponding Portfolios. The chapter presents the empirical properties of the model. It also presents a structural approach for the dynamics of credit-related assets within a CAPM-like framework. This setting enables the pricing of general single- and multiname credit derivatives, whereas the focus is on credit default swaps (CDS) and CDS indices. The chapter evaluates the model introduced by Kou, which describes the equity as well as the asset movements. It provides an outline of the contemplated credit derivatives and the underlying mechanism. The adopted modeling techniques are described. The main advantages of the approach are its economic validity, analytical tractability and the sparse number of parameters.