Default Risk
in Bond and Credit Derivatives Markets
This is the
author's PhD thesis in which he empirically tests today's reduced form models of
credit risk. The thesis starts by reviewing structural and reduced form models.
The author correctly points out that, although the original Merton structural
model directly modeled credit risk as the deterioration of a firm's capital,
more recent versions have entail assumptions that stray from that intuitive
economic interpretation. The author tests reduced form models against bond and
credit default swap data. Results are largely disappointing. Issues may relate
to
the
fact that credit spreads and liquidity spreads are difficult to distinguish from
one another;
data
issues, or
shortcomings
of the models.
Contents
1. Introduction
2. On the economic content of models of default risk
3. Intensity-based modeling of default
4. The empirical performance of
reduced-form models of default risk
5. Explaining credit default swap premia
6. Conclusion
App. A Calculation of volatility proxies
The implications for current credit risk models are
significant and should concern financial engineers, risk managers and
regulators.
The book's methodologies and results should be interesting
primarily to researchers but also to financial engineers, regulators, risk
managers and software vendors. While this is an empirical, a lot of current
theory is also covered, and there are plenty of citations to the emerging
literature. [10/28/05]
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the
fact that credit spreads and liquidity spreads are difficult to distinguish from
one another;