The valuation of correlation-dependent credit derivatives using a structural model

Hull, John C.; Predescu, Mirela; White, Alan

doi:10.21314/jcr.2010.112

Cited by 46 publications

(43 citation statements)

References 7 publications

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“…In practice, a default is announced on a daily basis, as Fang et al (2010) argue. In order to make models computationally more tractable, some studies, eg, Hull et al (2010) and Bush et al (2011), assume that default is detected only on spread payment dates. We follow this line and thus assume that defaults are monitored quarterly.…”

Section: Continuous Vs Discrete Default Monitoringmentioning

confidence: 99%

“…M , N and Y represent global factors that affect the default environment of all companies. As Hull et al (2010) note, such a global factor could be for instance the S&P 500 index. Other candidates could be Gross Domestic Product, or more specifically investment spending, central bank interest rates or the unemployment rate, since they indicate the phase of the business cycle of the economy.…”

Section: The Model Setupmentioning

confidence: 99%

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Numerical valuation of basket credit derivatives in structural jump-diffusion models

Bujok¹,

Reisinger²

2012

JCF

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We consider a model where each company's asset value follows a jump-diffusion process, and is connected with other companies via global factors. Motivated by ideas in Bush et al. (2011), where the joint density of asset values is evolved in a large basket approximation, we develop an algorithm for the efficient estimation of CDO index and tranche spreads consistent with underlying CDSs, through a finite difference simulation of the resulting SPDE. We verify the validity of this approximation numerically by comparison to results obtained by direct Monte Carlo simulation of the basket constituents. A calibration exercise assesses the flexibility of the model and its extensions to match CDO spreads from pre-crisis and crisis periods.

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Section: Continuous Vs Discrete Default Monitoringmentioning

confidence: 99%

Section: The Model Setupmentioning

confidence: 99%

Numerical valuation of basket credit derivatives in structural jump-diffusion models

Bujok¹,

Reisinger²

2012

JCF

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“…Hull et al (2005) A follows a non-negative diffusion process under the historical probability measure P , i.e., denotes the threshold associated with firm i . In that structural model, dependence between default times stems from the correlation between the asset values.…”

Section: I8 Hedging Credit Portfolio Derivatives In Multivariate Strmentioning

confidence: 99%

Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

Cousin¹,

Laurent

2011

Credit Risk Frontiers

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“…An open question would be to study such alternative structural models, and to exhibit the spread dynamics that would be consistent with a "perfect" replication. Since multivariate extensions of First-hitting time models are very complicated in analytic terms (Zhou 2001, Hull et al 2006), this avenue is left for further research.…”

Section: A Bridge Towards Structural Modelsmentioning

confidence: 99%

On Break-Even Correlation: The Way to Price Structured Credit Derivatives by Replication

Vigneron

Fermanian

2009

SSRN Journal

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We consider the pricing of European-style structured credit payoff in a static framework, where the underlying default times are independent given a common factor. A practical application would consist of the pricing of nth-to-default baskets under the Gaussian copula model (GCM). We provide necessary and sufficient conditions so that the corresponding asset prices are martingales and introduce the concept of "break-even" correlation matrix. When no sudden jump-to-default events occur, we show that the perfect replication of these payoffs under the GCM is obtained if and only if the underlying single name credit spreads follow a particular family of dynamics. We calculate the corresponding break-even correlations and we exhibit a class of Merton-style models that are consistent with this result. We explain why the GCM does not have a lot of competitors among the class of one-period static models, except perhaps the Clayton copula.

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The valuation of correlation-dependent credit derivatives using a structural model

Cited by 46 publications

References 7 publications

Numerical valuation of basket credit derivatives in structural jump-diffusion models

Numerical valuation of basket credit derivatives in structural jump-diffusion models

Dynamic Hedging of Synthetic CDO Tranches: Bridging the Gap between Theory and Practice

On Break-Even Correlation: The Way to Price Structured Credit Derivatives by Replication

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