Technical paper/Merton models
Optimal trade execution with unknown drift
This paper demonstrates a means through which to adapt results for optimal trading strategies under different conditions when the drift of the asset is unknown.
KVA as a transfer of wealth
A capital valuation adjustment designed to preserve a firm’s value to shareholders is introduced
Costs of capital under credit risk
In cost-of-capital computations, credit risk is only taken into consideration at the level of the debt beta approach. We show that applications of the debt beta approach in company valuation suffer from unrealistic assumptions about the market index and…
The optimal investment problem in stochastic and local volatility models
This paper considers the classical optimal investment allocation problem of Merton through the lens of some more modern approaches, such as the stochastic volatility and local volatility models.
A credit portfolio framework under dependent risk parameters: probability of default, loss given default and exposure at default
This paper introduces a credit portfolio framework that allows for dependencies between default probabilities, secured and unsecured recovery rates and exposures at default (EADs).
Credit risk: taking fluctuating asset correlations into account
This paper puts forward an ensemble approach for asset correlations.
Marking systemic portfolio risk with the Merton model
Marking systemic portfolio risk with the Merton model
Capturing credit correlation between counterparty and underlying
Capturing credit correlation between counterparty and underlying
Smiling jumps
Smiling jumps
Variance-covariance-based risk allocation in credit portfolios
Mikhail Voropaev proposes high-precision analytical approximation for variance-covariance-based risk allocation in a portfolio of risky assets. A general case of a single-period multi-factor Merton-type model with stochastic recovery is considered. The…
Low-default portfolios without simulation
Low-default portfolios are a key Basel II implementation challenge, and various statistical techniques have been proposed for use in PD estimation for such portfolios. To produce estimates using these techniques, typically Monte Carlo simulation is…
A saddle for complex credit portfolio models
Guido Giese applies the saddle-point approximation to analyse tail losses for very general credit portfolios, including correlated defaults, stochastic recovery rates, and dependency between default probabilities and recovery rates. The numerical…
A Merton approach to transfer risk
Transfer risk is the risk that debtors in a country are unable to ensure timely payments of foreign currency debt service due to transfer or exchange restrictions, or a general lack of foreign currency. Although this risk is not extensively addressed in…
Maximum likelihood estimate of default correlations
Estimating asset correlations is difficult in practice since there is little available data andmany parameters have to be found. Paul Demey, Jean-Frédéric Jouanin, Céline Roget andThierry Roncalli present a tractable version of the multi-factor Merton…
Correlated defaults: let's go back to the data
Estimates of asset value correlation are a key element of Merton-style credit portfoliomodels. Many practitioners have access to asset value data for a large universe of listedfirms, so estimation is within reach. Alan Pitts describes a statistical…
Multi-factor adjustment
The author presents an analytical method for calculating portfolio value-at-risk and expected shortfall in the multi-factor Merton framework. This method is essentially an extension of the granularity adjustment technique to a new dimension.