Credit gap risk in a first passage time model with jumps

Packham, Natalie; Schlögl, Lutz; Schmidt, Wolfgang M.

doi:10.1080/14697688.2012.739729

Cited by 6 publications

(2 citation statements)

References 21 publications

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“…van Deventer 2008, Heitfield 2008, Jorion 2009, Ascheberg et al 2013) demonstrate the importance of accounting for model risk, for example in terms of adjusting profitability and building reserves for model risk. Particularly striking examples were so-called Constant Proportion Debt Obligations (Cont andJessen 2012, Gordy andWillemann 2012), and leveraged credit securities, (Morini 2011, Packham et al 2013, whose valuation and dynamics are extremely sensitive to model assumptions.…”

Section: Introductionmentioning

confidence: 99%

Model risk of contingent claims

Detering¹,

Packham

2016

Quantitative Finance

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Paralleling regulatory developments, we devise value-at-risk and expected shortfall type risk measures for the potential losses arising from using misspecified models when pricing and hedging contingent claims. Essentially, P&L from model risk corresponds to P&L realized on a perfectly hedged position. Model uncertainty is expressed by a set of pricing models, each of which represents alternative asset price dynamics to the model used for pricing. P&L from model risk is determined relative to each of these models. Using market data, a unified loss distribution is attained by weighing models according to a likelihood criterion involving both calibration quality and model parsimony. Examples demonstrate the magnitude of model risk and corresponding capital buffers necessary to sufficiently protect trading book positions against unexpected losses from model risk. A further application of the model risk framework demonstrates the calculation of gap risk of a barrier option when employing a semi-static hedging strategy.

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Section: Introductionmentioning

confidence: 99%

Model risk of contingent claims

Detering¹,

Packham

2016

Quantitative Finance

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“…For an in-depth discussion of leveraged credit linked notes we refer to[19].1350021-13 Int. J. Theor.…”

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confidence: 99%

Credit Modeling Under Jump Diffusions With Exponentially Distributed Jumps — Stable Calibration, Dynamics and Gap Risk

Hellmich

Kassberger

Schmidt

2013

Int. J. Theor. Appl. Finan.

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This paper investigates a structural credit default model that is based on a hyperexponential jump diffusion process for the value of the firm. For credit default swap prices and other quantities of interest, explicit expressions for the corresponding Laplace transforms are derived. The time-dynamics of the model are studied, particularly the jumps in credit spreads, the understanding of which is crucial e.g. for the pricing of gap risk. As an application of our findings, the model is calibrated to credit default swap spreads observed in the market.with A 0 > 0 a constant and (Y t ) a Lévy process such that (exp(Y t )) is a Qmartingale. We assume a constant riskless interest rate r and a constant payout rate δ to the asset holders.The driving Lévy process (Y t ) is assumed to be a jump diffusion,k=1 1350021-6 Int. J. Theor. Appl. Finan. 2013.16. Downloaded from www.worldscientific.com by INDIANA UNIVERSITY @ BLOOMINGTON on 02/04/15. For personal use only. Credit Modeling Under Jump Diffusions with Exponentially Distributed Jumps

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