Most credit portfolio models currently used by the banking industry rely on Monte Carlo simulations for calculating the probability distribution of the future credit portfolio value, which can be quite computer time consuming. Adding market risk factors, such as stochastic interest rates or credit spreads, as additional ingredients of a credit portfolio model, the computational burden of full M...

This paper presents a review of the developments in the area of credit risk. Starting in 1974, Merton developed a pricing method for a bond facing default risk, which was mainly settled in the framework of Black and Scholes (1973). Certain attempts have been made to relax the assumptions, giving rise to a class of models called structural models. A second class, called hazard rate models, was f...

We develop a structural bond valuation model to simultaneously capture liquidity and credit risk. Our model implies that renegotiation in financial distress is influenced by the illiquidity of the market for distressed debt. As default becomes more likely, the components of bond yield spreads attributable to illiquidity increase. When we consider finite maturity debt, we find decreasing and con...

Credit scoring models play a fundamental role in the risk management practice at most banks. They are used to quantify credit risk at counterparty or transaction level in the different phases of the credit cycle (e.g. application, behavioural, collection models). The credit score empowers users to make quick decisions or even to automate decisions and this is extremely desirable when banks are ...

A general and efficient method for valuing credit derivatives based on multiple entities is developed in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of multiple firms. As an application we provide closed form expressions for the joint distribution of default times, default correlations, and default swap sprea...

We develop a general and efficient method for valuating credit derivatives based on multiple entities in an affine framework. This includes interdependence of market and credit risk, joint credit migration and counterparty default risk of multiple firms. As an application we provide closed form expressions for the joint distribution of default times, default correlations, and credit default spr...

Credit risk is an important issue of current research in finance. While there is a lot of work on modelling credit risk and on valuing credit derivatives there is no work on continuous-time portfolio optimization with defautable securities. Therefore, in this paper we solve investment problems with defautable bonds and stocks. Besides, our approach can be applied to portfolio problems, where th...