Pricing credit risk

The growth of the credit derivatives market has meant that Merton models are increasingly being used as a means of pricing both bonds and credit default swaps. Kate Birchall and Peter Zeitsch of ANZ Investment Bank analyse the evolution of these models

special-models-chart1-gif

The measurement of credit risk is one of the most active areas of modern finance. The advent of credit derivatives has heightened the need to capture credit exposures even further. In 1974, the publication of Robert Merton’s academic paper1 introduced a new way of analysing corporate debt by linking it to a company’s market capitalisation, thereby quantitatively measuring credit risk. Effectively, Merton treated equity as a call option on a company’s assets, with the strike at the total

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

Sorry, our subscription options are not loading right now

Please try again later. Get in touch with our customer services team if this issue persists.

New to Risk.net? View our subscription options

Most read articles loading...

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here