The term structure of credit spreads is studied with an aim to predict its future movements. A completely new approach to tackle this problem is presented, which utilizes nonlinear parametric models. The Brain-Cousens regression model with five parameters is chosen to describe the term structure of credit spreads. Furt…
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48 results for “credit spread”
New model predicts credit spreads using stochastic CIR++ intensities.
problem Lack of continuous stochastic credit spread models and limited term structure models.
method Stochastic CIR++ model for default intensities in risk-neutral space.
result Model produces realistic credit spread term structure curves and consistent diffusion over time.
Model estimates LIBOR rates and finds COVID-19 spread spike due to credit risk.
problem Estimating LIBOR rates and understanding the factors affecting them.
method Developed a joint model for various LIBOR-related rates and used it to decompose spreads.
result Credit risk mainly caused the spike in LIBOR-OIS spread during the COVID-19 onset, with equal contributions from credit and funding-liquidity risks on average.
Extracts credit-relevant information from earnings calls.
problem Investors do not fully internalize credit-relevant information from earnings calls.
method Develops a novel technique to extract credit-relevant information from earnings call text.
result The extracted information forecasts future credit spread changes and firm profitability.
A Case for AXIq-fin.RM
AXI assesses bank funding costs transparently, improving loan pricing and reducing financial risk.
problem Lack of credit-sensitive funding benchmarks after LIBOR transition.
method AXI aggregates unsecured funding transactions across maturities, producing a daily credit spread.
result AXI correlates with financial conditions and market stress, reducing funding risk and offering spread discounts.
We explain a persistent cost-of-carry spread in EUA market and suggest ECB policy change.
problem Persistent cost-of-carry spread in EUA market.
method Cointegration analysis of EUA spread with credit spread and risk-free rate.
result Cointegration found between EUA spread, credit spread, and risk-free rate.
The paper uses daily bond price data to estimate corporate default spreads, improving credit risk assessment.
problem Outdated credit risk information from quarterly accounting items.
method Adapting classic yield curve estimation methods to corporate bonds, using Bayesian estimation.
result High-frequency credit risk proxy via corporate default spreads improves model stability and prediction uncertainty.
We develop an efficient method to calibrate CDS spreads using asymptotic approximations.
problem Calibrating CDS spreads in the SSRD model with correlated processes.
method Asymptotic coefficient expansion to approximate solutions of nonlinear PDEs.
result Our approximation does not require uncorrelated interest rate and default intensity processes.
The paper uses option theory to estimate corporate bond liquidity spreads.
problem Estimating liquidity spreads for corporate bonds.
method Option-theoretic approach considering risk-free rate volatility and credit risk.
result The model provides a robust tool for pricing illiquid bonds.
This paper develops a two-dimensional structural framework for valuing credit default swaps and corporate bonds in the presence of default contagion. Modelling the values of related firms as correlated geometric Brownian motions with exponential default barriers, analytical formulae are obtained for both credit default…
Develops a three-currency HJM framework for Brazilian credit markets, finding significant credit spread differences between indexed segments.
problem Identifies and quantifies differences in corporate credit spreads between two parallel segments of the Brazilian bond market.
method Uses a Heath-Jarrow-Morton framework to model corporate credit as a separate economy, linking it to nominal and real economies through synthetic rates.
result Empirically finds a 640 basis point average difference in credit spreads between CDI-indexed and IPCA-indexed segments, stable through market cycles.
The credit spread curve. I: Fundamental concepts, fitting, par-adjusted spread, and expected returnq-fin.PR
The paper explains how to construct a credit spread curve from bond prices.
problem The challenge of constructing a credit spread curve from bond prices.
method Fit parametrised survival curves to construct the curve, avoiding the Z-spread issue.
result A concise treatment of the high-dollar price bonds trading at higher yields is explained.
We show that stochastic recovery always leads to counter-intuitive behaviors in the risk measures of a CDO tranche - namely, continuity on default and positive credit spread risk cannot be ensured simultaneously. We then propose a simple recovery variance regularization method to control the magnitude of negative credi…
In this paper, we propose a methodology based on piece-wise homogeneous Markov chain for credit ratings and a multivariate model of the credit spreads to evaluate the financial risk in European Union (EU). Two main aspects are considered: how the financial risk is distributed among the European countries and how large …
Companies do not operate in a vacuum. As companies move towards an increasingly specialized production function and their reach is becoming truly global, their aptitude in managing and shaping their inter-organizational network is a determining factor in measuring their health. Current models of company financial healt…
Paper finds political networks reduce bond issuance costs in China.
problem The financial value of within-government political networks in China.
method Using municipal leaders' working experience to measure political networks, the study examines the effect on bond issuance yield spreads.
result Political networks reduce bond issuance yield spreads by improving issuer credit ratings, especially in less developed financial markets.
We give a detailed account of correlations between credit sector/quality and treasury curve factors, using the robust framework of the Barclays POINT Global Risk Model. Consistent with earlier studies, we find a strong negative correlation between sector spreads and rate shifts. However, we also observe that the correl…
This paper studies the valuation of a class of default swaps with the embedded option to switch to a different premium and notional principal anytime prior to a credit event. These are early exercisable contracts that give the protection buyer or seller the right to step-up, step-down, or cancel the swap position. The …
Shorting IG ETFs can hedge bond portfolios during market drawdowns effectively.
problem Managing downside risk in bond portfolios during market crises.
method Constructing three signals (Momentum, Liquidity, Credit) to dynamically hedge short IG positions.
result Dynamic hedge removes when predicted hedged return mean reverts, achieving higher returns and Sortino ratios.
Through a long-period analysis of the inter-temporal relations between the French markets for credit default swaps (CDS), shares and bonds between 2001 and 2008, this article shows how a financial innovation like CDS could heighten financial instability. After describing the operating principles of credit derivatives i…
The paper models default probabilities and total defaults in credit portfolios using a contagion process with self-exciting jumps.
problem Modeling default probabilities and total defaults in credit portfolios to mitigate credit risk.
method Developed a contagion process with self-exciting jumps to model credit events and derive closed-form expressions for default probabilities and total defaults.
result The proposed framework captures the feedback effect and can be used to price synthetic CDOs.
We analyze the counterparty risk embedded in CDS contracts, in presence of a bilateral margin agreement. First, we investigate the pricing of collateralized counterparty risk and we derive the bilateral Credit Valuation Adjustment (CVA), unilateral Credit Valuation Adjustment (UCVA) and Debt Valuation Adjustment (DVA).…
The study examines how climate risk influences sovereign debt default decisions.
problem The relationship between climate risk and sovereign debt default decisions.
method Calibration of a model to analyze the credit spreads of sovereign bonds and the impact of climate vulnerability on bond spreads.
result Climate risk does not significantly influence the decision to default on sovereign debt.
Defining, Estimating and Using Credit Term Structures. Part 1: Consistent Valuation Measuresq-fin.PR
In this three-part series of papers, we argue that the conventional spread measures are not well defined for credit-risky bonds and introduce a set of credit term structures which correct for the biases associated with the strippable cash flow valuation assumption. We demonstrate that the resulting estimates are signif…
In the top-down approach to multi-name credit modeling, calculation of singe name sensitivities appears possible, at least in principle, within the so-called random thinning (RT) procedure which dissects the portfolio risk into individual contributions. We make an attempt to construct a practical RT framework that enab…
This paper presents a new model for pricing financial derivatives subject to collateralization. It allows for collateral arrangements adhering to bankruptcy laws. As such, the model can back out the market price of a collateralized contract. This framework is very useful for valuing outstanding derivatives. Using a uni…
This paper is a contribution to the Proceedings of the Workshop Complexity, Metastability and Nonextensivity held in Erice 20-26 July 2004, to be published by World Scientific. We propose a generalization to Merton's model for evaluating credit spreads. In his original work, a company's assets were assumed to follow a …
We develop a model for the dynamic evolution of default-free and defaultable interest rates in a LIBOR framework. Utilizing the class of affine processes, this model produces positive LIBOR rates and spreads, while the dynamics are analytically tractable under defaultable forward measures. This leads to explicit formul…
Credit Default Swaps (CDS) on a reference entity may be traded in multiple currencies, in that protection upon default may be offered either in the domestic currency where the entity resides, or in a more liquid and global foreign currency. In this situation currency fluctuations clearly introduce a source of risk on C…
A new model uses a Levy-driven process to value credit index swaptions.
problem Valuation of credit index swaptions in financial markets.
method Proposes a Levy-driven Ornstein-Uhlenbeck process to model risk-free rate and default intensities.
result Derives formulas for characteristic function, moments, and stationary distribution.
The paper explains the fair basis in bond-CDS trading during financial crises.
problem Large basis trading losses during financial crises are not explained by reduced form models.
method Dynamic spread model with bond repo financing, economic capital approach.
result Unhedged and unhedgeable residual jump to default risk exists, affecting fair basis level.
Paper evaluates different models for predicting credit default swap volatility.
problem Predicting the Implied Volatility of credit default swaps.
method SVM, Gradient Boosting, and Attention-GRU Hybrid model.
result Identifies strengths in classical and SOTA machine learning methods.
BSLP is a two-dimensional dynamic model of interacting portfolio-level loss and spread (more exactly, loss intensity) processes. The model is similar to the top-down HJM-like frameworks developed by Schonbucher (2005) and Sidenius-Peterbarg-Andersen (SPA) (2005), however is constructed as a Markovian, short-rate intens…
Linear Credit Risk Modelsq-fin.MF
We introduce a novel class of credit risk models in which the drift of the survival process of a firm is a linear function of the factors. The prices of defaultable bonds and credit default swaps (CDS) are linear-rational in the factors. The price of a CDS option can be uniformly approximated by polynomials in the fact…
In this paper we develop a tractable structural model with analytical default probabilities depending on some dynamics parameters, and we show how to calibrate the model using a chosen number of Credit Default Swap (CDS) market quotes. We essentially show how to use structural models with a calibration capability that …
In the third part of this series we introduce consistent relative value measures for CDS-Bond basis trades using the bond-implied CDS term structure derived from fitted survival rate curves. We explain why this measure is better than the traditionally used Z-spread or Libor OAS and offer simplified hedging and trading …
We develop a pricing model for Sovereign Contingent Convertible bonds (S-CoCo) with payment standstills triggered by a sovereign's Credit Default Swap (CDS) spread. We model CDS spread regime switching, which is prevalent during crises, as a hidden Markov process, coupled with a mean-reverting stochastic process of spr…
The mixed-fractional CEV model improves CDS pricing by accounting for default risk.
problem Improving the pricing of Credit Default Swaps (CDS) by accounting for default risk.
method Using a mixed-fractional Brownian motion to model the Constant Elasticity of Variance (CEV) model.
result The mixed-fractional CEV model yields more realistic CDS spreads and default probabilities.
Paper offers a simple CDS approximation formula with high accuracy.
problem Lack of CDS levels for market appreciation of companies' default risk.
method Developed a global and transparent Equity-to-Credit (E2C) formula using random forest regression.
result Random forest regression with E2C formula achieves 87.3% out-of-sample accuracy in CDS approximations.
Geopolitical and geoeconomic shocks affect sovereign risk differently, with distinct transmission channels.
problem Understanding how geopolitical and geoeconomic shocks impact sovereign credit risk.
method Daily panel data of 42 economies over 2018-2025; semistructural framework; Shapley-Taylor decomposition; machine learning predictions; placebo and sign-restricted SVAR evidence.
result Geopolitical shocks primarily increase sovereign credit spreads through direct repricing, while geoeconomic shocks mainly affect spreads through financial conditions and policy uncertainty.
Private credit markets have expanded significantly, offering unique lending technology to private equity firms.
problem Understanding the growth and characteristics of private credit markets.
method Systematic survey of academic literature, development of integrated theoretical framework, empirical evidence.
result Private credit markets offer a distinct lending technology with higher spreads over syndicated loans.
We develop a generalization of the Black-Cox structural model of default risk. The extended model captures uncertainty related to firm's ability to avoid default even if company's liabilities momentarily exceeding its assets. Diffusion in a linear potential with the radiation boundary condition is used to mimic a compa…
Motivated by the interplay between structural and reduced form credit models, we propose to model the firm value process as a time-changed Brownian motion that may include jumps and stochastic volatility effects, and to study the first passage problem for such processes. We are lead to consider modifying the standard f…
In this work we derive an approximated no-arbitrage market valuation formula for Constant Maturity Credit Default Swaps (CMCDS). We move from the CDS options market model in Brigo (2004), and derive a formula for CMCDS that is the analogous of the formula for constant maturity swaps in the default free swap market unde…
New methods for calculating credit valuation adjustment with reduced noise and faster computation.
problem High statistical noise in computing sensitivities of CVA due to non-differentiable default intensities.
method Ad hoc analytical estimators to overcome non-differentiability and finite differences.
result Low statistical noise and fast computation of sensitivities to market quotes.
In this paper we use a hybrid Monte Carlo-Optimal quantization method to approximate the conditional survival probabilities of a firm, given a structural model for its credit defaul, under partial information. We consider the case when the firm's value is a non-observable stochastic process and inver…
Discrete tenor models for credit risky portfolios driven by time-inhomogeneous Lévy processesq-fin.PR
The goal of this paper is to specify dynamic term structure models with discrete tenor structure for credit portfolios in a top-down setting driven by time-inhomogeneous Lévy processes. We provide a new framework, conditions for absence of arbitrage, explicit examples, an affine setup which includes contagion and prici…
This article presents FVA and CVA of a bilateral derivative in a coherent manner, based on recent developments in fair value accounting and ISDA standards. We argue that a derivative liability, after primary risk factors being hedged, resembles in economics an issued variable funding note, and should be priced at the m…