Chapter2007

Utility Valuation of Credit Derivatives: Single and Two-Name Cases

21 citations0/0 files storedBirkhäuser Boston eBooks

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Credit Risk and Financial Regulations Stochastic processes and financial applications Financial Risk and Volatility Modeling

Abstract

We study the effect of risk aversion on the valuation of credit derivatives. Using the technology of utility-indiffierence valuation in intensity-based models of default risk, we analyze resulting yield spreads for single-name defaultable bonds and a simple representative two-name credit derivative. The impact of risk averse valuation on prices and yield spreads is expressed in terms of “effective correlation.”

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References

1998Methods of Mathematical Finance 1995Pricing Derivatives on Financial Securities Subject to Credit Risk 1998On cox processes and credit risky securities 1999The asymptotic elasticity of utility functions and optimal investment in incomplete markets 1979An introduction to mathematical risk theory 1970Mathematical Methods in Risk Theory 1989Optimal replication of contingent claims under transaction costs 2003Credit Risk

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