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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26586
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| Title: | An Integrated Pricing Model for Defaultable Loans and Bonds |
| Authors: | Onorato, Mario
Altman, Edward I. |
| Issue Date: | Feb-2003 |
| Series/Report no.: | FIN-03-009 |
| Abstract: | In recent years, credit risk has played a key role in risk management
issues. Practitioners, academics and regulators have been fully involved
in the process of developing, studying and analysing credit risk models
in order to find the elements which characterize a sound risk management
system. In this paper we present an integrated model, based on a reduced
pricing approach, for market and credit risk. Its main features are
those of being mark to market and that the spread term structure by
rating class is contingent on the seniority of debt within an
arbitrage-free framework. We introduce issues such as, the integration
of market and credit risk, the use of stochastic recovery rates and
recovery by seniority. Moreover, we will characterise default risk by
estimating migration risk through a "mortality rate",
actuarial based, approach. The resultant probabilities will be the base
for determining multi-period risk-neutral transition probability that
allow pricing of risky debt in the trading and banking book. |
| URI: | http://hdl.handle.net/2451/26586 |
| Appears in Collections: | Finance Working Papers
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