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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26755

Authors: Altman, Edward I.
Onorato, Mario
Keywords: statistical simulation methods
financial risk management
credit risk measurement model
asset pricing
debt & debt management
Issue Date: Feb-2003
Series/Report no.: S-CDM-03-05
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 analyzing 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 characterize 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/2451/26755
Appears in Collections:Credit & Debt Markets

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