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Optimal incentives and securitization of defaultable assets

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On the Relation Between the Credit Spread Puzzle and the Equity Premium Puzzle

Pierre Collin Dufresne

Structural models of default calibrated to historical default rates, recovery rates, and Sharpe ratios typically generate Baa-Aaa credit spreads that are significantly below historical values. However, this "credit spread puzzle" can be resolved if one acc ...

2009

Credit Derivatives in an Affine Framework

Damir Filipovic, Li Chen

An efficient method for valuing credit derivatives based on three entities is developed in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of three forms. As an application ...

2007

Capital structure, credit risk, and macroeconomic conditions

Erwan Morellec

This paper develops a framework for analyzing the impact of macroeconomic conditions on credit risk and dynamic capital structure choice. We begin by observing that when cash flows depend on current economic conditions, there will be a benefit for firms to ...

2006

A Simple Model for Credit Migration and Spread Curves

Damir Filipovic

We propose and examine a simple model for credit migration and spread curves of a single firm both under real-world and risk-neutral measures. This model is a hybrid of a structural and a reduced-form model. Default is triggered either by successive downgr ...

Springer Verlag2005

Selling Less Information for More: Garbling with Benefits

Thomas Alois Weber

The expected value of information in a standard portfolio investment problem with ex-post payment can increase when the information is garbled prior to its sale. Distorting the information helps to resolve the incentive problem decreasing the buyer’s defau ...

2004

Quadratic Term Structure Models for Risk-Free and Defaultable Rates

Damir Filipovic

In this paper, quadratic term structure models (QTSMs) are analyzed and characterized in a general Markovian setting. The primary motivation for this work is to find a useful extension of the traditional QTSM, which is based on an Ornstein{Uhlenbeck (OU) s ...

Wiley-Blackwell2004

A Mixed Approach to Modeling Default Risk

Damir Filipovic, Li Chen

Structural and reduced-form models are two well-established approaches to modelling a firm’s default risk. Here, Li Chen, Damir Filipovic and Vincent Poor develop a new default risk modelling strategy based on combining these two frameworks in order to ove ...

Risk2004

A General Formula for Valuing Defaultable Securities

Pierre Collin Dufresne

Previous research has shown that under a suitable no-jump condition, the price of a defaultable security is equal to its risk-neutral expected discounted cash flows if a modified discount rate is introduced to account for the possibility of default. Below, ...

2004

Volatility and Sovereign Default

Luisa Lambertini

Over and over again, history shows that countries default on external debt when their economies experience a downturn. This paper presents a theoretical model of international lending that is consistent with this evidence. Productivity is stochastic and in ...

2003

On the Term Structure of Default Premia in the Swap and LIBOR Markets

Pierre Collin Dufresne

Existing theories of the term structure of swap rates provide an analysis of the Treasury-swap spread based on either a liquidity convenience yield in the Treasury market, or default risk in the swap market. Although these models do not focus on the relati ...

Wiley-Blackwell2001