Let vt, t denote the price at time t of a defaultable zerocoupon bond with face value 1 maturing at time t, tt. Analytical valueatrisk with jumps and credit risk by darrell duffie of stanford university, and jun pan of stanford university 379k pdf 27 pages november 29, 1999. Thanks for contributing an answer to quantitative finance stack exchange. Singleton ma y 21, 1999 graduate sc ho ol of business, stanford univ ersit y abstract. Transform analysis and asset pricing for affine jump. He is coauthor, with darrell duffie, of credit risk. I can think of no scholars better qualified than they to embark on this ambitious task. Darrell duffie is the james irvin miller professor of finance at the graduate school of business, stanford university. Jan 26, 2003 duffie and singleton offer critical assessments of alternative approaches to creditrisk modeling, while highlighting the strengths and weaknesses of current practice.
Both structural and reducedform approaches are very comprehensively surveyed by lando 1997 and schonbucher 2000. Singleton, default and recovery implicit in the term structure of sovereign cds spreads, the journal of finance, 63, 5, 23452384, 2008. Singleton is adams distinguished professor of management and senior associate dean for academic affairs at the graduate school of business, stanford university. The term structure of real interest rates and the cox, ingersoll, and ross model. Furthermore, there can be bond or contractspecific liquidity effects.
The curve pfet,as t varies over future dates, is the potential exposure profile, up to the final maturity of the portfolio of trades with the counterparty. An empirical analysis of the dynamic relation between. Compared with previous work done in this area, such as the seminal paper by duffie and singleton 1997, the paper includes daily credit spreads data in the time series framework. Singleton simulation, which were also used by lee and ingram 1991 for their sme estimator, nor those imposed by mcfadden 1989 and pakes and pollard 1989 for simulated moments estimation in i.
In particular, we use an identified version of the affine process specification given in duffie, filipovic, and schachermayer 2003 which allows for a richer covariance structure among risk factors than the commonly used specification of dai and singleton 2000. Interest rate volatility, the yield curve, and the. Using the model of madan and unal 1998, vt, t is evaluated as follows. Default and recovery implicit in the term structure of. Duffie and singleton 1999 and jarrow and turnbull 1995 and applying them to price credit default swap contracts. A case study of russian debt with lasse pedersen and ken singleton, journal of finance 2003, volume 58. According to duffie and singleton, defaultable bonds can be valued by discounting at a defaultadjusted interest rate, r. Central to our analysis of the term structure of sovereign cds spreads is the active trading of contracts across a wide range of maturities. Credit swap valuation by darrell duffie of stanford university 236k pdf 30 pages. James darrell duffie born may 23, 1954 is a canadian financial economist, is dean witter distinguished professor of finance at stanford graduate school of business he is the author of numerous research articles, and several books including futures markets, dynamic asset pricing theory, andwith kenneth singletoncredit risk duffie has been on the finance faculty at stanford since 1984. Darrell duffie of stanford university 86k pdf pages october 2003. Among empirical studies with an emergingmarket focus, the paper that appears to be most similar to the dynamic analysis undertaken here is chanlau and.
We will now consider onefactor models for the term structure of interest rates within a continuoustime framework. Risk in overthecounter transactions and the combination of credit and market risk has been discussed in duffie and singleton 2003, the modelling of ccr is analysed in pykhtin and zhou 2006, 2007 and in canabarro 2010, while martin 2010 provides an overview of model risk in ccr systems. Affine processes and applications in finance with damir filipovic and walter schachermayer, annals of applied probability 2003. Singleton corresponding author duffie and singleton are at the graduate school of business, stanford university, and pedersen is at the stern school of business, new york university. Singleton stanford university graduate school of business, aqr capital management, llc and stanford university graduate school of business. Empirical dynamic asset pricing princeton university press.
Extracted from assetliability management of financial nstitutions, euromoney books 2003 euromoney institutional investor plc level of potential exposure that is exceeded with only 5% probability. The tradition approach to credit risk and its estimation for. In this book, two of americas leading economists provide the first integrated treatment of the conceptual, practical, and empirical foundations for credit risk pricing and risk measurement. The tradition approach to credit risk and its estimation for selected. Sovereign cds and bond pricing dynamics in emerging. A case study of russian debt, darrell duffie, lasse h. Their approach blends indepth discussions of the conceptual foundations of modeling with extensive analyses of the empirical properties of such creditrelated time series as.
Darrell duffie, graduate school of business, stanford. Princeton university press, 2003, darrell duffie and kenneth j. Wiley online library liuren wu and frank xiaoling zhang, a noarbitrage analysis of macroeconomic determinants of the credit spread term structure, management science, 54, 6. Reduced form mortgage pricing as an alternative to option. Duffie and singleton 1999s reducedform approach and hull 2000s replicatingportfolio approach. The issue is whether liquidity or credit or both is the main determinant of swap spreads dynamics. James darrell duffie born may 23, 1954 is a canadian financial economist, is dean witter distinguished professor of finance at stanford graduate school of business he is the author of numerous research articles, and several books including futures markets, dynamic asset pricing theory, andwith kenneth singletoncredit risk. But avoid asking for help, clarification, or responding to other answers. By darrell duffie, jun pan, and kenneth singleton in the setting of affine jumpdiffusion state processes, this paper provides an analytical treatment of a class of transforms, including various laplace and fourier transforms as special cases, that allow an analytical treatment of a ranige of valuatioin and.
Interest rate volatility, the yield curve, and the macroeconomy. Duffie and singleton, 2003 stated that credit risk is one of the most common risks to the financial market and it represents a basic risk for banks and financial institutions. A case study of russian debt with duffie and singleton the journal of finance, 2003, vol. In particular, we will consider how to price bonds given a onefactor diffusion model for the riskfree rate,rt. From the institutefaculty of actuaries definition of an actuary, we learn that actuaries manage assets and liabilities by analysing past events, assessing the present risks involved and modelling what could happen in the future. He is also the recipient of the smithbreeden distinguished paper award from the journal of finance. Darrell duffie, graduate school of business, stanford university. Measuring and marking counterparty risk darrell duffie. First, are far as we are able to determine we are the first to empirically examine the pricing of credit default swaps, an important instrument in the developing over the counter credit derivatives. Nominated for the smithbreeden prize for the best paper in the journal of finance. Exploring a structural view of default 1 daniel covitz and song han division of research and statistics the federal reserve board 20th and c streets, nw washington, d. Pedersen, and ken singleton 2003, the journal of finance 58, 119159.
Darrell duffie and kenneth singleton model credit risk for the purpose of. A fellow of the econometric society, he is the recipient of the organizations frisch prize. The tradition approach to credit risk and its estimation for selected banks in slovakia. Duffie and singleton offer critical assessments of alternative approaches to creditrisk modeling, while highlighting the strengths and weaknesses of current practice. Miller distinguished professor of finance at the graduate school of business, stanford university. See dai and singleton 2003 for a more complete reference. An important issue related to credit risk is the factors that affect credit yield spreads of corporate bonds. Securities lending, shorting, and pricing with darrell duffie and nicolae garleanu. From the institutefaculty of actuaries definition of an actuary, we learn that actuaries manage assets and liabilities by analysing past events, assessing the present risks involved and modelling what could happen in.
Central to our analysis of the term structure of sovereign cds spreads is the. For more detailed accounts of creditrisk modelling the interested reader is referred to the various texts cited in this chapter and also to the comprehensive books on creditrisk modelling by bielecki and rutkowski 2002 and duffie and singleton 2003. This paper investigates the determinants of swap spreads. Convection and radiation, properties of materials, components, systems and applications to active space and water heating are discussed. Credit risk is divided into the risk of loss due to changes in credit spread measured by the change of rating with a market valuation of products. Many of the newest developments in solar energy science and technology are covered in this second edition. A model of credit risk accounting for both default and restructuring. Affine processes and applications in finance with damir filipovic and walter schachermayer, annals of applied probability 2003, volume. September 2003 abstract we consider a factor approach to the pricing of basket credit derivatives and synthetic cdo tranches.
This paper extends the traditional hazard technique of estimating prepayment and default by allowing their baselines to be stochastic processes, rather than known paths of time, as is typically assumed. His books include dynamic asset pricing theory princeton and futures markets prenticehall. Extracted from assetiability management of inancial institutions euromone books 2003 euromone institutional investor plc chapter 9 measuring and marking counterparty risk eduardo canabarro head of credit quantitative risk modeling, goldman sachs darrell duffie professor, stanford university graduate school of business. Our purpose is to deal in a convenient way with dependent defaults for a large number of names. In this paper we formulate a corporate bond cb pricing model for deriving the term structure of default probabilities tsdp and the recovery rate rr for each pair of industry factor and credit rating grade, and these derived tsdp and rr are regarded as what investors imply. The tradition approach to credit risk and its estimation. Duffie and singleton develop the intellectual basis for understanding, modeling, and measuring credit risk and then develop the issue of risk management.
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