Credit derivatives: the past, the present and the future
The determinants of credit spread returns
What’s driving the default swap basis?
What is the value of modified restructuring?
The debt and equity linkage and the valuation of credit derivatives
Nth to default swaps and notes: all about default correlation
Portfolio credit risk models
Credit derivatives as an efficient way of transitioning to optimal portfolios
Overview of the CDO market
Synthetic securitisation and structured portfolio credit derivatives
Integrating credit derivatives and securitisation technology: the collateralised synthetic obligation
CDOs of CDOs: art eating itself?
Extreme events and multi-name credit derivatives
Reduced-form models: curve construction and the pricing of credit swaps, options and hybrids
Modelling and hedging of default risk
ISDA’s role in the credit derivatives marketplace
Credit linked notes
Using guarantees and credit derivatives to reduce credit risk capital requirements under the New Basel Capital Accord
In the context of stochastic models, explosion means that the variable that is modelled can go to infinity with positive probability. An example of this is the following model:
where a is a positive constant and W is a Brownian motion with W(0) = 0. Here x will go to infinity as W approaches a, and the process x is thus only well defined up to the first passage time of W to the level a.
In most finance models the stochastic dynamics of the modelled variables are restricted to prevent explosions, as we are rarely interested in prices or rates that are infinite. But in this chapter we actually make use of explosive processes to give us more realistic dynamics of credit default swap (CDS) spreads.
The case for this is based on the observation that defaults can be anticipated as well as unanticipated. If a default is anticipated it is well known in the market that the company has financial problems and the actual default will tend to happen after a period of steep increases in credit spreads and corresponding declines in bond and equity prices. Default can also be a complete surprise to the financial markets,