16. Risk Transfer and Pricing of Illiquid Assets with Loan CDS

  1. Daniel Rösch and
  2. Harald Scheule
  1. Michael Schwalba,
  2. Matthias Korn and
  3. Konstantin Müller

Published Online: 29 AUG 2013

DOI: 10.1002/9781118818503.ch16

Credit Securitizations and Derivatives: Challenges for the Global Markets

Credit Securitizations and Derivatives: Challenges for the Global Markets

How to Cite

Schwalba, M., Korn, M. and Müller, K. (2013) Risk Transfer and Pricing of Illiquid Assets with Loan CDS, 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.ch16

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:

  • CDS contract;
  • illiquid asset classes;
  • Illiquid Assets;
  • intensity-based approach;
  • shipping market;
  • structural approach

Summary

The current market environment seems to make it difficult for banks to act as long-term credit lenders on their own balance sheet anymore. However, the distressed state of the market should offer plenty of attractive investment opportunities. The modeling of the risk-neutral default dynamics in particular is a crucial point in any valuation framework and has been subject to extensive research. In today's credit derivatives literature, there are two main modeling approaches: the intensity-based approach and the structural approach. This chapter summarizes the intensity-based approach which can be regarded as the market standard for liquidly traded asset classes. In illiquid asset classes like shipping, where available market-data of traded securities is generally scarce, the only available data is often based on internal rating or credit risk models. Modeling framework is used to derive the fair spread of a CDS contract.