Credit Risk

In this book, two of America's leading economists provide the first integrated treatment of the conceptual, practical, and empirical foundations for credit risk pricing and risk measurement. Masterfully applying theory to practice, Darrell Duffie and Kenneth Singleton model credit risk for the purpose of measuring portfolio risk and pricing defaultable bonds, credit derivatives, and other securities exposed to credit risk. The methodological rigor, scope, and sophistication of their state-of-the-art account is unparalleled, and its singularly in-depth treatment of pricing and credit derivatives further illuminates a problem that has drawn much attention in an era when financial institutions the world over are revising their credit management strategies.
Duffie and Singleton offer critical assessments of alternative approaches to credit-risk modeling, while highlighting the strengths and weaknesses of current practice. Their approach blends in-depth discussions of the conceptual foundations of modeling with extensive analyses of the empirical properties of such credit-related time series as default probabilities, recoveries, ratings transitions, and yield spreads. Both the "structura" and "reduced-form" approaches to pricing defaultable securities are presented, and their comparative fits to historical data are assessed. The authors also provide a comprehensive treatment of the pricing of credit derivatives, including credit swaps, collateralized debt obligations, credit guarantees, lines of credit, and spread options. Not least, they describe certain enhancements to current pricing and management practices that, they argue, will better position financial institutions for future changes in the financial markets.
Credit Risk is an indispensable resource for risk managers, traders or regulators dealing with financial products with a significant credit risk component, as well as for academic researchers and students.

• 1. Introduction
• 1.1. A Brief Zoology of Risks
• 1.2. Organization of Topics
• 2. Economic Principles of Risk Management
• 2.1. What Types of Risk Count Most?
• 2.2. Economics of Market Risk
• 2.3. Economic Principles of Credit Risk
• 2.4. Risk Measurement
• 2.5. Measuring Credit Risk
• 3. Default Arrival: Historical Patterns and Statistical Models
• 3.1. Introduction
• 3.2. Structural Models of Default Probability
• 3.3. From Theor to Practice: Using Distance to Default to Predict Default
• 3.4. Default Intensity
• 3.5. Examples of Intensity Models
• 3.6. Default-Time Simulation
• 3.7. Statistical Prediction of Bankruptcy
• 4. Ratings Transitions: Historical Patterns and Statistical Models
• 4.1. Average Transition Frequencies
• 4.2. Ratings Risk and the Business Cycle
• 4.3. Ratings Transitions and Aging
• 4.4. Ordered Probits of Ratings
• 4.5. Ratings as Markov Chains
• 5. Conceptual Approaches to Valuation of Default Risk
• 5.1. Introduction
• 5.2. Risk-Neutral versus Actual Probabilities
• 5.3. Reduced-Form Pricing
• 5.4. Structural Models
• 5.5. Comparisons of Model-Implied Spreads
• 5.6. From Actual to Risk-Neutral Intensities
• 6. Pricing Corporate and Sovereign Bonds
• 6.1. Uncertain Recover
• 6.2. Reduced-Form Pricing with Recover
• 6.3. Ratings-Based Models of Credit Spreads
• 6.4. Pricing Sovereign Bonds
• 7. Empirical Models of Defaultable Bond Spreads
• 7.1. Credit Spreads and Economic Activity
• 7.2. Reference Curves for Spreads
• 7.3. Parametric Reduced-Form Models
• 7.4. Estimating Structural Models
• 7.5. Parametric Models of Sovereign Spreads
• 8. Credit Swaps
• 8.1. Other Credit Derivatives
• 8.2. The Basic Credit Swap
• 8.3. Simple Credit-Swap Spreads
• 8.4. Model-Based CDS Rates
• 8.5. The Role of Asset Swaps
• 9. Optional Credit Pricing
• 9.1. Spread Options
• 9.2. Callable and Convertible Corporate Debt
• 9.3. A Simple Convertible Bond Pricing Model
• 10. Correlated Defaults
• 10.1. Alternative Approaches to Correlation
• 10.2. CreditMetrics Correlated Defaults
• 10.3. Correlated Default Intensities
• 10.4. Copula-Based Correlation Modeling
• 10.5. Empirical Methods
• 10.6. Default-Time Simulation Algorithms
• 10.7. Joint Default Events
• 11. Collateralized Debt Obligations
• 11.1. Introduction
• 11.2. Some Economics of CDOs
• 11.3. Default-Risk Model
• 11.4. Pricing Examples
• 11.5. Default Loss Analytics
• 11.6. Computation of Diversity Scores
• 12. Over-the-Counter Default Risk and Valuation
• 12.1. Exposure
• 12.2. OTC Credit Risk Value Adjustments
• 12.3. Additional Swap Credit Adjustments
• 12.4. Credit Spreads on Currency Swaps
• 13. Integrated Market and Credit Risk Measurement
• 13.1. Market Risk Factors
• 13.2. Delta-Gamma for Derivatives with Jumps
• 13.3. Integration of Market and Credit Risk
• 13.4. Examples of VaR with Credit Risk
• Appendix A Introduction to Affine Processes
• Appendix B Econometrics of Affine Term-Structure Models
• Appendix C HJM Spread Curve Models