Stuart M. Turnbull
Bauer Chaired Professor, Bauer College of Business, University of Houston
In this issue we have four papers. The first paper, by Ernst Eberlein, Wolfgang Kluge and Philipp Schönbucher, models the dynamic evolutions of the term structures of default-free and credit-risky interest rates. A time-inhomogeneous Lévy process is used and pricing formulae are derived for credit-risky bonds, credit default swaps and options on credit default swaps. The second paper, by Peter Miu and Bogie Ozdemir, examines the Basel II requirement that banks use downturn loss given default estimates. They address the important practical issue of estimating downturn loss given default values.
The last two papers were accepted while Michael Ong was the editor. The third paper, by Craig Friedman and Sven Sandow, examines the important issue of model performance. They address the question of how one picks a model. The fourth paper, by Thorsten Lehnert and Frederick Neske, shows that there is an asymmetric response to downgrades and upgrades in credit default swap prices for European reference entities.
Basel requirements of downturn loss given default: modeling and estimating probability of default and loss given default correlations
On the relationship between credit rating announcements and credit default swap spreads for European reference entities