The market for credit derivatives is growing rapidly. The credit derivative market’s global size was estimated to be $100 billion to $200 billion in 1996. The British Bankers Association estimated that the size was $1.6 trillion in 2001. Now the size is about $62 trillion [10]. The demand is strong because credit derivatives provide varieties that can fit different clients. The fundamental cred...

This paper provides a simple analytic formula for valuing default swaps with correlated market and credit risk. We illustrate the numerical implementation of this model by inferring the default probability parameters implicit in default swap quotes for twenty two companies over the time period 8/21/00 to 10/31/00. For comparison, with also provide implicit estimates for the standard model (a sp...

Using a large data set on credit default swaps, we study how default risk interacts with interest-rate risk and liquidity risk to jointly determine the term structure of credit spreads. We classify the reference companies into two broad industry sectors, two broad credit rating classes, and two liquidity groups. We develop a class of dynamic term structure models that include (i) two benchmark ...

This paper focuses on the defaultable lease rate term structure with endogenous default. We combine the competitive lease market argument proposed by Grenadier (1996) and the endogenous default structural model proposed by Leland and Toft (1996) to examine the interaction between the lessee’s capital structure and the equilibrium lease rate. Under this framework, determining the lease rate is a...

Estimating Recovery Rate and Recovery Amount has taken a more importance in consumer credit because of both the new Basel Accord regulation and the increase in number of defaulters due to the recession. We examine whether it is better to estimate Recovery Rate (RR) or Recovery amounts. We use linear regression and survival analysis models to model Recovery rate and Recovery amount, thus to pred...

Our model comprises a firm, which sets a default contribution rate for the company savings plan, and the workers who choose their behavior in response. Consider a group of workers with quasi-hyperbolic preferences, so that they have discount function 1, βδ, βδ, ... where 0 < β ≤ 1. For simplicity, we assume that δ = 1, eliminating long run discounting. We also assume that each worker has an exo...