A guide to using Levy processes for credit risk modeling. It covers various types of credit derivatives, from the single-name vanilla derivatives to complex structured credit risk products. It uses real market data to analyze and illustrate derivative structures and also covers the underpinnings of Levy processes in credit risk modeling.
This is an introductory guide to using Levy processes for credit risk modeling. This introductory guide to Levy processes covers all types of credit derivatives, from the single-name vanilla derivatives to more complex structured credit risk products. It refines credit risk modeling with jump processes, a vital revision for today's tumultuous credit market. Readers will learn how the classical models can be improved with Levy processes. The book uses real market data to analyze and illustrate derivative structures and covers both the practical and theoretical underpinnings of Levy processes in credit risk modeling. Wim Schoutens (Leuven, Belgium) is a Research Professor of Financial Engineering in the Department of Mathematics at the Catholic University of Leuven in Belgium. He is recognized as one of the world's leading authorities on Levy processes. Jessica Cariboni (Ispra, Italy) is a functionary at the European Commission and a researcher at the Institute for the Protection and Security of Citizens, where she specializes in applied statistics for antifraud.
I INTRODUCTION 1 An Introduction to Credit Risk 1.1 Credit Risk 1.2 Credit Risk Modeling 1.3 Credit Derivatives 1.4 Modeling Assumptions 2 An Introduction to L-evy Processes 2.1 Brownian Motion 2.2 L-evy Processes 2.3 Examples of L-evy Processes 2.4 Ornstein Uhlenbeck Processes II SINGLE NAME MODELING 3 Single Name Credit Derivatives 3.1 Credit Default Swaps 3.2 Credit Default Swap Forwards 3.3 Constant Maturity Credit Default Swaps 3.4 Options on CDS 4 Firm Value L-evy Models 4.1 The Merton Model 4.2 The Black-Cox Model with Constant Barrier 4.3 The L-evy First Passage Model 4.4 The Variance Gamma Model 4.5 One Sided L-evy Default Model 4.6 Dynamic Spread Generator Appendix A: Solution of the PDIE 5 Intensity L-evy Models 5.1 Intensity Models for Credit Risk 5.2 The Intensity OU-Model 5.3 Calibration of the Model on CDS Term Structures III MULTIVARIATE MODELING 6 Multivariate Credit Products 6.1 CDOs . 6.2 Credit Indices 7 CDOs 7.1 Introduction 7.2 The Gaussian One-Factor Model . 7.3 Generic One-Factor L-evy Model 7.4 Examples of L-evy Models 7.5 L-evy Base Correlation 7.6 Delta-Hedging CDO tranches 8 Multivariate Index Modeling 8.1 Black's Model 8.2 VG Credit Spread Model 8.3 Pricing Swaptions using FFT 8.4 Multivariate VG Model IV EXOTIC STRUCTURED CREDIT RISK PROD- UCTS 9 Credit CPPIs and CPDOs 9.1 Introduction 9.2 CPPIs 9.3 Gap Risk 9.4 CPDOs 10 Asset-Backed Securities 10.1 Introduction 10.2 Default models 10.3 Prepayment Models 10.4 Numerical Results Bibliography