Use the link below to share a fulltext version of this article with your friends and colleagues. Discretetime dynamic term structure models with generalized market prices of risk qiang dai, anh le, and kenneth j. Center for economic research department of economics. Pedersen, and ken singleton 2003, the journal of finance 58, 119159. Asset price dynamics with slowmoving capital darrell duffie. The case of onedimensional nonnegative affine processes, generalized as in appendix b to the case of general l6vy jump measures, corresponds to the case of continuous branching processes with. He has published widely on financial risks and their impacts on economic decisionmaking, including books on credit risk and dynamic asset pricing. An explicit, multifactor credit default swap pricing. Singleton simulation, which were also used by lee and ingram 1991 for their sme estimator, nor those imposed by mcfadden 1989 and pakes and pollard 1989 for simulated moments estimation in i. We build on the framework of duffie and singleton 1999, showing that cash flows. Singleton is adams distinguished professor of management and senior associate dean for academic affairs at the graduate school of business, stanford university. Darrell duffie is the james irvin miller professor of finance at the graduate school of business, stanford university.
Duffie, pedersen and singleton 2003 extend the 1999 article by modeling the spread of the different securities issued by russia on u. By fo cusing directly on r, these pricing mo dels com bine the e ects of c hanges in the default free short rate rate r and riskneutral mean loss rate hl on b ond prices. Analytical valueatrisk with jumps and credit risk by darrell duffie of stanford university, and jun pan of stanford university 379k pdf 27 pages november 29, 1999. From the institutefaculty of actuaries definition of an actuary, we learn that actuaries manage assets and liabilities by analysing past events, assessing the present risks involved and modelling what could happen in. Pricing, measurement, and management by darrell duffie and kenneth j. His books include dynamic asset pricing theory princeton and futures markets prenticehall. Darrell duffie of stanford university 86k pdf pages october 2003.
Forecasting default with the merton distance to default. If collateral is costless, we show that swaps are indeed priced by discounting net swap payments at the risk free rate as in he 2001 and collindufresne and solnik 2001. Darrell duffie, guillaume horel, leandro saita and andreas eckner. Credit risk management practices differ from bank to bank.
Kenneth singleton is the adams distinguished professor of management, emeritus at the graduate school of business at stanford university. Pricing, measurement, and management princeton series in finance duffie, darrell, singleton, kenneth j. Singleton ma y 21, 1999 graduate sc ho ol of business, stanford univ ersit y abstract. Default and recovery implicit in the term structure of. Mertons model, credit risk, and volatility skews john. Duffie and singleton offer critical assessments of alternative approaches to creditrisk modeling, while highlighting the strengths and weaknesses of current practice. Therefore in this case the bank may consider its credit exposure to be equal to the line of the credit. We now turn to an example of computing forward probabilities. Stanford university graduate school of business and stanford university graduate school of business. Singleton 2003, princeton university press, 396 pages. According to duffie and singleton, defaultable bonds can be valued by discounting at a defaultadjusted interest rate, r. The importance of credit risk management in banking. Their approach blends indepth discussions of the conceptual foundations of modeling with extensive analyses of the empirical properties of such creditrelated time series as.
Darrell duffie, graduate school of business, stanford. Abstract i describe asset price dynamics caused by the slow movement of investment capital to trading opportunities. Duffie and singleton 1999s reducedform approach and hull 2000s replicatingportfolio approach. Princeton university press, 2003, darrell duffie and kenneth j. Structural credit pricing models are based on modelling the stochastic evolution of the balance sheet of the issuer, with default when the issuer is unable to or unwillingly to meet its obligations. An important issue related to credit risk is the factors that affect credit yield spreads of corporate bonds. Duffie and singleton offer critical assessments of alternative approaches to creditrisk modeling, while highlighting the strengths and weaknesses of current. Bibliography derivatives analytics with python wiley. Singleton, chapter 20 fixedincome pricing, financial markets and asset pricing, 10. The model is discussed in duffie and singleton 2003 and saunders and allen 2002. A case study of russian debt with lasse pedersen and ken singleton, journal of finance 2003, volume 58. Note that w t i and w t f are standard brownian motions, which are mutually independent where w t i is specific to. A case study of russian debt with duffie and singleton the journal of finance, 2003, vol. Following duffie and singleton 1997, we use a default.
In order for x to be well defined, there are joint restrictions on d, p, a,a, v, as discussed in duffie and kan 1996 and dai and singleton 1999. Xeupayoff function x t of x, where is scalar and the n elements 01tt0 of each of 1 and u are scalars. He is also the recipient of the smithbreeden distinguished paper award from the journal of finance. Pirotte 2001, duffie and singleton 2003, and schonbucher 2003and. James darrell duffie born may 23, 1954 is a canadian financial economist, is dean witter distinguished professor of finance at stanford graduate school of business he is the author of numerous research articles, and several books including futures markets, dynamic asset pricing theory, andwith kenneth singletoncredit risk duffie has been on the finance faculty at stanford since 1984. Empirical dynamic asset pricing princeton university press. In this paper we will deal with a subset of reduced form models, those that are ratings based. A fellow of the econometric society, he is the recipient of the organizations frisch prize. Affine processes and applications in finance with damir filipovic and walter schachermayer, annals of. Credit exposure as a fraction can also be used sometimes to calculate the credit exposure for the total line of credit. A case study of russian debt, darrell duffie, lasse h. Consider the risk free a 1 2 term structure model in duffie, pedersen, and singleton 2003. For every ajd model, both of quasi analytic european option price formulas.
Pricing, measurement, and management is a part of the princeton series in finance series edi. Darrell duffie and kenneth singleton, 2003, credit risk, princeton university press. Duffie, d, j pan and k singleton 2000, transform analysis and asset pricing for affine jump diffusions, econometrica 68. An explicit, multifactor credit default swap pricing model with correlated factors abstract with the recent significant growth in the singlename credit default swap market has come the need for accurate and computationally efficient models to value these instruments. A case study of russian debt, the journal of finance, 58, 1, 119159, 2003. Credit risk models and the valuation of credit default. Miller distinguished professor of finance at the graduate school of business, stanford university. Following lando 1998 and duffie and singleton 2003, we model a credit. From the institutefaculty of actuaries definition of an actuary, we learn that. Pricing, measurement, and management darrell duffie. The body of results regard ing defaultfree termstructure models is immediately applicable to pricing defaultable claims. Optionbased models are found in merton 1974, longstaff and schwartz 1995 and jones and rosenfeld 1984. Credit risk models and the valuation of credit default swap contracts 1. November 2003 university of toronto, super computing consulting group.
To emphasize the generality of the approach, we augment the model with jumps occurring with intensity. The pattern of price responses to supply or demand shocks typically involves a sharp reaction to the shock and a subsequent and more extended. Singleton is with the graduate school of business, stanford. Credit swap valuation by darrell duffie of stanford university 236k pdf 30 pages. The lack of information is the fundamental principle of credit risk so we will pick an example of a simulation of credit risk based in a reducedform model provided in duffie and singleton 2003. Master of finance program credit risk course syllabus. While the model developed by duffiepansingleton 2000 model can be used. Le is a graduate student at the stern school of business. Singleton, an econometric model of the term structure of interestrate swap yields. Transform analysis and asset pricing for affine jump. Finally, we subtract the riskfree part of the zero recovery risky yield to obtain. Duffie and singleton, 2003 stated that credit risk is one of the most common risks to the financial market and it represents a basic risk for banks and financial institutions. Interest rate volatility, the yield curve, and the. Duffie, d, and k singleton 2003, credit risk pricing and risk management for financial institutions princeton university press, princeton, ny.
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