Journal articles: 'The default price'

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He, Taoshun. "Explicit Pricing Formulas for European Option with Asset Exposed to Double Defaults Risk." Discrete Dynamics in Nature and Society 2018 (June 25, 2018): 1–8. http://dx.doi.org/10.1155/2018/8362912.

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We derive analytical formulas for European call and put options on underlying assets that are exposed to double defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price to drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. A novel technique is developed to evaluate the European call and put options by first conditioning on the predefault and the postdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with default-free option model and counterparty default risk option model.

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He, Taoshun. "Option Pricing for Path-Dependent Options with Assets Exposed to Multiple Defaults Risk." Discrete Dynamics in Nature and Society 2020 (February 12, 2020): 1–13. http://dx.doi.org/10.1155/2020/2418620.

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In the present paper, we derive analytical formulas for barrier and lookback options with underlying assets exposed to multiple defaults risks which include exogenous counterparty default risk and endogenous default risk. The endogenous default risk leads the asset price drop to zero and the exogenous counterparty default risk induces a drop in the asset price, but the asset can still be traded after this default time. An original technique is developed to valuate the barrier and lookback options by first conditioning on the predefault and the afterdefault time and then obtaining the unconditional analytic formulas for their price. We also compare the pricing results of our model with the default-free option model and exogenous counterparty default risk option model.

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DI GRAZIANO, GIUSEPPE, and L. C. G. ROGERS. "A DYNAMIC APPROACH TO THE MODELING OF CORRELATION CREDIT DERIVATIVES USING MARKOV CHAINS." International Journal of Theoretical and Applied Finance 12, no. 01 (February 2009): 45–62. http://dx.doi.org/10.1142/s0219024909005142.

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The modeling of credit events is in effect the modeling of the times to default of various names. The distribution of individual times to default can be calibrated from CDS quotes, but for more complicated instruments, such as CDOs, the joint law is needed. Industry practice is to model this correlation using a copula/base correlation approach, which suffers significant deficiencies. We present a new approach to default correlation modeling, where defaults of different names are driven by a common continuous-time Markov process. Individual default probabilities and default correlations can be calculated in closed form. We provide semi-analytic formulas for the pricing of CDO tranches via Laplace-transform techniques which are both fast and easy to implement. The model calibrates to quoted tranche prices with a high degree of precision and allows one to price non-standard tranches in a consistent and arbitrage-free manner. The number of parameters of the model is flexible and can be adjusted to adapt to the set of market data one is calibrating to. More importantly, the model is dynamically consistent and can be used to price options on tranches and other exotic path-dependent products.

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Amador, Manuel, and Christopher Phelan. "Reputation and Sovereign Default." Econometrica 89, no. 4 (2021): 1979–2010. http://dx.doi.org/10.3982/ecta16685.

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This paper presents a continuous‐time model of sovereign debt. In it, a relatively impatient sovereign government's hidden type switches back and forth between a commitment type, which cannot default, and an opportunistic type, which can, and where we assume outside lenders have particular beliefs regarding how a commitment type should borrow for any given level of debt and bond price. In any Markov equilibrium, the opportunistic type mimics the commitment type when borrowing, revealing its type only by defaulting on its debt at random times. The equilibrium features a “graduation date”: a finite amount of time since the last default, after which time reputation reaches its highest level and is unaffected by not defaulting. Before such date, not defaulting always increases the country's reputation. For countries that have recently defaulted, bond prices and the total amount of debt are increasing functions of the amount of time since the country's last default. For countries that have not recently defaulted (i.e., those that have graduated), bond prices are constant.

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LI, PING, HOUSHENG CHEN, XIAOTIE DENG, and SHUNMING ZHANG. "ON DEFAULT CORRELATION AND PRICING OF COLLATERALIZED DEBT OBLIGATION BY COPULA FUNCTIONS." International Journal of Information Technology & Decision Making 05, no. 03 (September 2006): 483–93. http://dx.doi.org/10.1142/s0219622006002076.

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Default correlation is the key point for the pricing of multi-name credit derivatives. In this paper, we apply copulas to characterize the dependence structure of defaults, determine the joint default distribution, and give the price for a specific kind of multi-name credit derivative — collateralized debt obligation (CDO). We also analyze two important factors influencing the pricing of multi-name credit derivatives, recovery rates and copula function. Finally, we apply Clayton copula, in a numerical example, to simulate default times taking specific underlying recovery rates and average recovery rates, then price the tranches of a given CDO and then analyze the results.

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Battiston, Stefano, Guido Caldarelli, Robert M. May, Tarik Roukny, and Joseph E. Stiglitz. "The price of complexity in financial networks." Proceedings of the National Academy of Sciences 113, no. 36 (August 23, 2016): 10031–36. http://dx.doi.org/10.1073/pnas.1521573113.

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Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises.

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Donkers, Bas, Benedict G. C. Dellaert, Rory M. Waisman, and Gerald Häubl. "Preference Dynamics in Sequential Consumer Choice with Defaults." Journal of Marketing Research 57, no. 6 (October 14, 2020): 1096–112. http://dx.doi.org/10.1177/0022243720956642.

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This research examines the impact of defaults on product choice in sequential-decision settings. Whereas prior research has shown that a default can affect what consumers purchase by promoting choice of the preselected option, the influence of defaults is more nuanced when consumers make a series of related choices. In such a setting, consumer preferences may evolve across choices due to “spillover” effects from one choice to subsequent choices. The authors hypothesize that defaults systematically attenuate choice spillover effects because accepting a default is a more passive process than either choosing a nondefault option in the presence of a default or making a choice in the absence of a default. Three experiments and a field study provide compelling evidence for such default-induced changes in choice spillover effects. The findings show that firms’ setting of high-price defaults with the aim of influencing consumers to choose more expensive products can backfire through the attenuation of spillover. In addition to advancing the understanding of the interplay between defaults and preference dynamics, insights from this research have important practical implications for firms applying defaults in sequential choices.

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Kim, In Joon, Suk Joon Byun, and Yuen Jung Park. "The Impact of Default Correlations on the Prices of Collateralized Bond Obligat." Journal of Derivatives and Quantitative Studies 10, no. 1 (May 31, 2002): 113–42. http://dx.doi.org/10.1108/jdqs-01-2002-b0005.

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This paper presents a numerical procedure for pricing collateralized bond obligations (CBO) and analyze the impact of default correlations for the prices of collateralized bond obligations. Specifically, we adopt default correlation model of Zhou (2001) and first passage time model of Black and Cox (1976). The model of Black and Cox is used for estimating the value of the firm and the volatility of the firm value which are unobservable variables. We find that the impact of default correlations on the prices of collateralized bond obligations is generally quite large. This can be tested by carrying out Monte-Carlo simulations for firm value processes, assuming first no default correlations and second modeling default correlations between the processes. We also compare the model prices and recently issued CBO market price and find that no default correlation model over prices the issued CBO and default correlation model under prices the issued CBO. These results in this paper emphasize that modeling default correlations is very important in analyzing CBO and a more complicated further analysis is required.

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Zhi, Kangquan, Jie Guo, and Xiaosong Qian. "Basket Credit Derivative Pricing in a Markov Chain Model with Interacting Intensities." Mathematical Problems in Engineering 2020 (October 16, 2020): 1–17. http://dx.doi.org/10.1155/2020/5369879.

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In this paper, we propose a Markov chain model to price basket credit default swap (BCDS) and basket credit-linked note (BCLN) with counterparty and contagion risks. Suppose that the default intensity processes of reference entities and the counterparty are driven by a common external shock as well as defaults of other names in the contracts. The stochastic intensity of the external shock is a Cox process with jumps. We derive recursive formulas for the joint distribution of default times and obtain closed-form premium rates for BCDS and BCLN. Numerical experiments are performed to show how the correlated default risks may affect the premium rates.

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CARR, PETER, and ALIREZA JAVAHERI. "THE FORWARD PDE FOR EUROPEAN OPTIONS ON STOCKS WITH FIXED FRACTIONAL JUMPS." International Journal of Theoretical and Applied Finance 08, no. 02 (March 2005): 239–53. http://dx.doi.org/10.1142/s0219024905002974.

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We derive a partial integro differential equation (PIDE) which relates the price of a calendar spread to the prices of butterfly spreads and the functions describing the evolution of the process. These evolution functions are the forward local variance rate and a new concept called the forward local default arrival rate. We then specialize to the case where the only jump which can occur reduces the underlying stock price by a fixed fraction of its pre-jump value. This is a standard assumption when valuing an option written on a stock which can default. We discuss novel strategies for calibrating to a term and strike structure of European options prices. In particular using a few calendar dates, we derive closed form expressions for both the local variance and the local default arrival rate.

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Wang, Anjiao, and Zhongxing Ye. "Credit Risky Securities Valuation under a Contagion Model with Interacting Intensities." Journal of Applied Mathematics 2011 (2011): 1–20. http://dx.doi.org/10.1155/2011/158020.

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We study a three-firm contagion model with counterparty risk and apply this model to price defaultable bonds and credit default swap (CDS). This model assumes that default intensities are driven by external common factors as well as other defaults in the system. Using the “total hazard” approach, default times can be generated and the joint density function is obtained. We represent the pricing method of defaultable bonds and obtain the closed-form pricing formulas. By the approach of “change of measure,” analytical solutions of CDS swap rate (swap premuim) are derived in the continuous time framework and the discrete time framework, respectively.

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12

Duffee, Gregory R. "Estimating the Price of Default Risk." Review of Financial Studies 12, no. 1 (January 1999): 197–226. http://dx.doi.org/10.1093/rfs/12.1.197.

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Duffee, Gregory R. "Estimating the Price of Default Risk." Finance and Economics Discussion Series 1996, no. 29 (July 1996): 1–42. http://dx.doi.org/10.17016/feds.1996.29.

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14

BRIGO, DAMIANO, and KYRIAKOS CHOURDAKIS. "COUNTERPARTY RISK FOR CREDIT DEFAULT SWAPS: IMPACT OF SPREAD VOLATILITY AND DEFAULT CORRELATION." International Journal of Theoretical and Applied Finance 12, no. 07 (November 2009): 1007–26. http://dx.doi.org/10.1142/s0219024909005567.

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We consider counterparty risk for Credit Default Swaps (CDS) in presence of correlation between default of the counterparty and default of the CDS reference credit. Our approach is innovative in that, besides default correlation, which was taken into account in earlier approaches, we also model credit spread volatility. Stochastic intensity models are adopted for the default events, and defaults are connected through a copula function. We find that both default correlation and credit spread volatility have a relevant impact on the positive counterparty-risk credit valuation adjustment to be subtracted from the counterparty-risk free price. We analyze the pattern of such impacts as correlation and volatility change through some fundamental numerical examples, analyzing wrong-way risk in particular. Given the theoretical equivalence of the credit valuation adjustment with a contingent CDS, we are also proposing a methodology for valuation of contingent CDS on CDS.

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Ping, Li, and Wang Xiaoxu. "Empirical Pricing of Chinese Defaultable Corporate Bonds Based on the Incomplete Information Model." Mathematical Problems in Engineering 2014 (2014): 1–5. http://dx.doi.org/10.1155/2014/286739.

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The default of Suntech Power made the year 2013 in China “the first year of default” of bond markets. People are also clearly aware of the default risk of corporate bonds and find that fair pricing for defaultable corporate bonds is very important. In this paper we first give the pricing model based on incomplete information, then empirically price the Chinese corporate bond “11 super JGBS” from Merton’s model, reduced-form model, and incomplete information model, respectively, and then compare the obtained prices with the real prices. Results show that all the three models can reflect the trend of bond prices, but the incomplete information model fits the real prices best. In addition, the default probability obtained from the incomplete information model can discriminate the credit quality of listed companies.

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Ngo, M., T. Nguyen, and T. Duong. "Indifference pricing with counterparty risk." Bulletin of the Polish Academy of Sciences Technical Sciences 65, no. 5 (October 1, 2017): 695–702. http://dx.doi.org/10.1515/bpasts-2017-0074.

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Abstract We present counterparty risk by a jump in the underlying price and a structural change of the price process after the default of the counterparty. The default time is modeled by a default-density approach. Then we study an exponential utility-indifference price of an European option whose underlying asset is exposed to this counterparty risk. Utility-indifference pricing method normally consists in solving two optimization problems. However, by using the minimal entropy martingale measure, we reduce to solving just one optimal control problem. In addition, to overcome the incompleteness obstacle generated by the possible jump and the change in structure of the price process, we employ the BSDE-decomposition approach in order to decompose the problem into a global-before-default optimal control problem and an after-default one. Each problem works in its own complete framework. We demonstrate the result by numerical simulation of an European option price under the impact of jump’s size, intensity of the default, absolute risk aversion and change in the underlying volatility.

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Kim, Hyeongjun, Hoon Cho, and Doojin Ryu. "Corporate Default Predictions Using Machine Learning: Literature Review." Sustainability 12, no. 16 (August 6, 2020): 6325. http://dx.doi.org/10.3390/su12166325.

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Corporate default predictions play an essential role in each sector of the economy, as highlighted by the global financial crisis and the increase in credit risk. This study reviews the corporate default prediction literature from the perspectives of financial engineering and machine learning. We define three generations of statistical models: discriminant analyses, binary response models, and hazard models. In addition, we introduce three representative machine learning methodologies: support vector machines, decision trees, and artificial neural network algorithms. For both the statistical models and machine learning methodologies, we identify the key studies used in corporate default prediction. By comparing these methods with findings from the interdisciplinary literature, our review suggests some new tasks in the field of machine learning for predicting corporate defaults. First, a corporate default prediction model should be a multi-period model in which future outcomes are affected by past decisions. Second, the stock price and the corporate value determined by the stock market are important factors to use in default predictions. Finally, a corporate default prediction model should be able to suggest the cause of default.

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Dumitrescu, Roxana, Marie-Claire Quenez, and Agnès Sulem. "American options in an imperfect complete market with default." ESAIM: Proceedings and Surveys 64 (2018): 93–110. http://dx.doi.org/10.1051/proc/201864093.

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We study pricing and hedging for American options in an imperfect market model with default, where the imperfections are taken into account via the nonlinearity of the wealth dynamics. The payoff is given by an RCLL adapted process (ξt). We define the seller's price of the American option as the minimum of the initial capitals which allow the seller to build up a superhedging portfolio. We prove that this price coincides with the value function of an optimal stopping problem with a nonlinear expectation 𝓔g (induced by a BSDE), which corresponds to the solution of a nonlinear reflected BSDE with obstacle (ξt). Moreover, we show the existence of a superhedging portfolio strategy. We then consider the buyer's price of the American option, which is defined as the supremum of the initial prices which allow the buyer to select an exercise time τ and a portfolio strategy φ so that he/she is superhedged. We show that the buyer's price is equal to the value function of an optimal stopping problem with a nonlinear expectation, and that it can be characterized via the solution of a reflected BSDE with obstacle (ξt). Under the additional assumption of left upper semicontinuity along stopping times of (ξt), we show the existence of a super-hedge (τ, φ) for the buyer.

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Vercammen, Kelsey A., Johannah M. Frelier, Alyssa J. Moran, Caroline G. Dunn, Aviva A. Musicus, Julia Wolfson, Omar S. Ullah, and Sara N. Bleich. "Understanding price incentives to upsize combination meals at large US fast-food restaurants." Public Health Nutrition 23, no. 2 (December 4, 2019): 348–55. http://dx.doi.org/10.1017/s1368980019003410.

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AbstractObjective:To understand price incentives to upsize combination meals at fast-food restaurants by comparing the calories (i.e. kilocalories; 1 kcal = 4·184 kJ) per dollar of default combination meals (as advertised on the menu) with a higher-calorie version (created using realistic consumer additions and portion-size changes).Design:Combination meals (lunch/dinner: n 258, breakfast: n 68, children’s: n 34) and their prices were identified from online menus; corresponding nutrition information for each menu item was obtained from a restaurant nutrition database (MenuStat). Linear models were used to examine the difference in total calories per dollar between default and higher-calorie combination meals, overall and by restaurant.Setting:Ten large fast-food chain restaurants located in the fifteen most populous US cities in 2017–2018.Participants:None.Results:There were significantly more calories per dollar in higher-calorie v. default combination meals for lunch/dinner (default: 577 kJ (138 kcal)/dollar, higher-calorie: 707 kJ (169 kcal)/dollar, difference: 130 kJ (31 kcal)/dollar, P < 0·001) and breakfast (default: 536 kJ (128 kcal)/dollar, higher-calorie: 607 kJ (145 kcal)/dollar, difference: 71 kJ (17 kcal)/dollar, P = 0·009). Results for children’s meals were in the same direction but were not statistically significant (default: 536 kJ (128 kcal)/dollar, higher-calorie: 741 kJ (177 kcal)/dollar, difference: 205 kJ (49 kcal)/dollar, P = 0·053). Across restaurants, the percentage change in calories per dollar for higher-calorie v. default combination meals ranged from 0·1 % (Dunkin’ Donuts) to 55·0 % (Subway).Conclusions:Higher-calorie combination meals in fast-food restaurants offer significantly more calories per dollar compared with default combination meals, suggesting there is a strong financial incentive for consumers to ‘upsize’ their orders. Future research should test price incentives for lower-calorie options to promote healthier restaurant choices.

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DYRSSEN, HANNAH, ERIK EKSTRÖM, and JOHAN TYSK. "PRICING EQUATIONS IN JUMP-TO-DEFAULT MODELS." International Journal of Theoretical and Applied Finance 17, no. 03 (May 2014): 1450019. http://dx.doi.org/10.1142/s0219024914500198.

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We study pricing equations in jump-to-default models, and we provide conditions under which the option price is the unique classical solution, with a special focus on boundary conditions. In particular, we find precise conditions ensuring that the option price at the default boundary coincides with the recovery payment. We also study spatial convexity of the option price, and we explore the connection between preservation of convexity and parameter monotonicity.

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Helwege, Jean, Samuel Maurer, Asani Sarkar, and Yuan Wang. "Credit Default Swap Auctions and Price Discovery." Journal of Fixed Income 19, no. 2 (September 30, 2009): 34–42. http://dx.doi.org/10.3905/jfi.2009.19.2.034.

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Chou, Pin-Huang, Mei-Chen Lin, and Min-Teh Yu. "Price limits, margin requirements, and default risk." Journal of Futures Markets 20, no. 6 (2000): 573–602. http://dx.doi.org/10.1002/1096-9934(200007)20:6<573::aid-fut4>3.0.co;2-o.

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Kühne, Swen Jonas, Ester Reijnen, and Aureliano Crameri. "When Too Few Is Bad for the Environment." Swiss Journal of Psychology 79, no. 1 (January 2020): 35–41. http://dx.doi.org/10.1024/1421-0185/a000232.

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Abstract. Defaults are an effective tool in shaping consumers’ decisions. However, only a few studies have investigated the role of defaults regarding consumers’ choices of electricity products. Moreover, each of these studies used binary choice sets (gray vs. green electricity). Notably, decision-making research has shown that consumer choice patterns are considerably influenced by the size of the choice set (e.g., adding a third option). The question is, does this also hold for defaults, that is, do they function differently depending on the choice set size? In our experimental study, participants could choose between three electricity products (gray, green, and eco), which varied in their environmental friendliness and price, the default randomly being one of the three products. In addition, we had a no-default condition. Contrary to the other studies, we found not only a default effect for the least environmentally friendly gray product, but also for the environmentally friendlier products green and eco electricity. Moreover, the popularity of the middle option – the green electricity product – was not reduced by adding a third product. The results indicate that increasing the set size by adding an eco-product and by intelligently setting the default could increase the number of consumers buying environmentally friendly electricity products.

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Chen, Yu-Ting, Cheng-Few Lee, and Yuan-Chung Sheu. "An Integral-Equation Approach for Defaultable Bond Prices with Application to Credit Spreads." Journal of Applied Probability 46, no. 01 (March 2009): 71–84. http://dx.doi.org/10.1017/s0021900200005234.

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We study defaultable bond prices in the Black–Cox model with jumps in the asset value. The jump-size distribution is arbitrary, and following Longstaff and Schwartz (1995) and Zhou (2001) we assume that, if default occurs, the recovery at maturity depends on the ‘severity of default’. Under this general setting, the vehicle for our analysis is an integral equation. With the aid of this, we prove some properties of the bond price which are consistent numerically and empirically with earlier works. In particular, the limiting credit spread as time to maturity tends to 0 is nonzero. As a byproduct, we show that the integral equation implies an infinite-series expansion for the bond price.

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Chen, Yu-Ting, Cheng-Few Lee, and Yuan-Chung Sheu. "An Integral-Equation Approach for Defaultable Bond Prices with Application to Credit Spreads." Journal of Applied Probability 46, no. 1 (March 2009): 71–84. http://dx.doi.org/10.1239/jap/1238592117.

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We study defaultable bond prices in the Black–Cox model with jumps in the asset value. The jump-size distribution is arbitrary, and following Longstaff and Schwartz (1995) and Zhou (2001) we assume that, if default occurs, the recovery at maturity depends on the ‘severity of default’. Under this general setting, the vehicle for our analysis is an integral equation. With the aid of this, we prove some properties of the bond price which are consistent numerically and empirically with earlier works. In particular, the limiting credit spread as time to maturity tends to 0 is nonzero. As a byproduct, we show that the integral equation implies an infinite-series expansion for the bond price.

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Kregzde, Arvydas, and Gediminas Murauskas. "ANALYSIS OF LITHUANIAN CREDIT DEFAULT SWAPS." Journal of Business Economics and Management 16, no. 5 (April 29, 2015): 916–30. http://dx.doi.org/10.3846/16111699.2014.890130.

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This paper studies international sovereign Credit Default Swaps (CDS) market focusing attention to the CDS of Central and East Europe. The main purpose of the study was to perform detail analysis of Lithuanian CDS in the global capital market. We compared the CDS markets of other countries and found some commonalities between them. We study the credit curve produced by CDS and volatility of CDS. A great attention is paid to investigate the relationship of CDS and the government bond market. Analysis of finding a leading role of CDS and the bond markets in the price discovering process is made. A leading market for different periods is found by using the Vector Error Correction model. Our main finding is that during the volatile period price discovery takes place in the bond market and in the calm period price discovery is observed in the CDS market. Disclosed relationship between CDS spreads and Eurobonds yield risk premium gives an additional decision making tool for sovereign debt managers.

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Butar-Butar, Sansaloni. "Income Smoothing, Default Risk and Stock Price Crashes: The Moderating Effect of Manager Age." Jurnal Dinamika Akuntansi dan Bisnis 7, no. 1 (April 16, 2020): 107–24. http://dx.doi.org/10.24815/jdab.v7i1.15129.

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The purpose of this study is to investigate the moderating role of manager age on the association between income smoothing and stock price crashes and the association between default risk and stock price crashes. The data was collected from the samples of 182 companies firms listed on the Indonesia Stock Exchange from 2013 to 2017 (910 firm-year observation). Using the multivariate analysis as the data analysis method, this study revealed that manager age and default risk were negatively associated with stock price crashes. On the other hand, the income smoothing was not significantly associated with stock price crashes. With regard to moderating effect of manager age, the results showed that manager age effect the association between default risk and stock price crashes with a positive direction. Meanwhile, no significant effect of manager age on the association between income smoothing and stock price crashes is found in this study.

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Guerrieri, Veronica, and Péter Kondor. "Fund Managers, Career Concerns, and Asset Price Volatility." American Economic Review 102, no. 5 (August 1, 2012): 1986–2017. http://dx.doi.org/10.1257/aer.102.5.1986.

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We propose a model of delegated portfolio management with career concerns. Investors hire fund managers to invest their capital either in risky bonds or in riskless assets. Some managers have superior information on default risk. Based on past performance, investors update beliefs on managers and make firing decisions. This leads to career concerns that affect managers' investment decisions, generating a countercyclical “reputational premium.” When default risk is high, return on bonds is high to compensate uninformed managers for the high risk of being fired. As default risk changes over time, the reputational premium amplifies price volatility. (JEL G11, G12, G23, L84)

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Luo, Xin, and Jinlin Zhang. "Pricing Chinese Convertible Bonds with Default Intensity by Monte Carlo Method." Discrete Dynamics in Nature and Society 2019 (April 15, 2019): 1–8. http://dx.doi.org/10.1155/2019/8610126.

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This article proposes a new way to price Chinese convertible bonds by the Longstaff-Schwartz Least Squares Monte Carlo simulation. The default intensity and the volatility are the two important parameters, which are difficultly obtained in the emerging market, in pricing convertible bonds. By developing the Merton theory, we find a new effective method to get the theoretical value of the two parameters. In the pricing method, the default risk is described by the default intensity, and a default on a bond is triggered by the bottom Q(T) (default probability) percentile of the simulated stock prices at the maturity date. In the present simulation, a risk-free interest rate is used to discount the cash flows. So, the new pricing model is considered to tally with the general pricing rule under martingale measure. The empirical results of the CEB and the XIG convertible bonds by the proposed method are compared with those obtained by the credit spreads method. It is also found that the theoretical prices calculated by the method proposed in the article fit the market prices well, especially, in the long run tendency.

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Yu, Zhiyuan, Muhammad Hafeez, Lihan Liu, Muhammad Tariq Mahmood, and Hong Wu. "Evaluating the Minor Coarse Cereals Product Crowdfunding Platform through Evolutionary Game Analysis." Sustainability 11, no. 5 (March 1, 2019): 1299. http://dx.doi.org/10.3390/su11051299.

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In the modern era, the minor coarse cereals (MCC) are particularly popular among consumers. Price fluctuations cause misperceptions for growers, but also bring about complications for processing enterprises and consumers. To solve this problem, a multi-grain product crowdfunding platform is proposed. To this end, an evolutionary game model is constructed to investigate the game equilibrium between growers and crowdfunders. The analysis determines that evolutionary game equilibrium is related to the relative price difference between the sowing period and the harvest period, and to the social/logistical cost. Under normal circumstances, the crowdfunder may default when the sowing-period price is greater than the harvest-period price. The grower may default if the sowing-period price is less than the harvest-period price. Therefore, in the design of a crowdfunding system for MCC products, a certain percentage of advance payment (30%) and certain default deposits should be collected from crowdfunders and growers, respectively.

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Chen, Shen-Yuan. "Valuation of Covered Warrant Subject to Default Risk." Review of Pacific Basin Financial Markets and Policies 06, no. 01 (March 2003): 21–44. http://dx.doi.org/10.1142/s0219091503001018.

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There is no margin settlement mechanism for existing covered warrants in Taiwan, thus the credit risk of the warrant issuer must be considered when investors evaluate the price of a covered warrant. This paper applies the vulnerable option valuation model to empirically study the difference in the theoretical value of a vulnerable warrant, Black–Scholes option price and the market price of warrant by using the Taiwan warrant data. Empirical results show that the theoretical value of a vulnerable warrant is lower than the Black–Scholes non-vulnerable option value and its market value.

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BRUECKNER, JAN K., PAUL S. CALEM, and LEONARD I. NAKAMURA. "House-Price Expectations, Alternative Mortgage Products, and Default." Journal of Money, Credit and Banking 48, no. 1 (January 19, 2016): 81–112. http://dx.doi.org/10.1111/jmcb.12291.

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Bruce, Norris, Ernan Haruvy, and Ram Rao. "Seller rating, price, and default in online auctions." Journal of Interactive Marketing 18, no. 4 (January 2004): 37–50. http://dx.doi.org/10.1002/dir.20021.

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Dong, Yinghui, Guojing Wang, and Rong Wu. "Pricing the Zero-Coupon Bond and its Fair Premium Under a Structural Credit Risk Model with Jumps." Journal of Applied Probability 48, no. 02 (June 2011): 404–19. http://dx.doi.org/10.1017/s0021900200007956.

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In this paper we consider a structural form credit risk model with jumps. We investigate the credit spread, the price, and the fair premium of the zero-coupon bond for the proposed model. The price and the fair premium of the bond are associated with the Laplace transform of default time and the firm's expected present market value at default. We give sufficient conditions under which the Laplace transform and the expected present market value of a firm at default are twice continuously differentiable. We derive closed-form expressions for them when the jumps have a hyperexponential distribution. Using the closed-form expressions, we obtain numerical solutions for the default probability, the credit spread, and the fair premium of the bond.

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Dong, Yinghui, Guojing Wang, and Rong Wu. "Pricing the Zero-Coupon Bond and its Fair Premium Under a Structural Credit Risk Model with Jumps." Journal of Applied Probability 48, no. 2 (June 2011): 404–19. http://dx.doi.org/10.1239/jap/1308662635.

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In this paper we consider a structural form credit risk model with jumps. We investigate the credit spread, the price, and the fair premium of the zero-coupon bond for the proposed model. The price and the fair premium of the bond are associated with the Laplace transform of default time and the firm's expected present market value at default. We give sufficient conditions under which the Laplace transform and the expected present market value of a firm at default are twice continuously differentiable. We derive closed-form expressions for them when the jumps have a hyperexponential distribution. Using the closed-form expressions, we obtain numerical solutions for the default probability, the credit spread, and the fair premium of the bond.

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36

Cottle, DJ. "The derivation of economic values in breeding programs for Australian Merino sheep with changing wool prices and flock production averages." Australian Journal of Agricultural Research 41, no. 4 (1990): 769. http://dx.doi.org/10.1071/ar9900769.

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The impact of fluctuating wool prices on setting economic values (EVs) in selection indices, e.g. WOOLPLAN, are studied by modelling genetic change in a flock following index selection, Operating under different wool price regimes. Because future price changes are difficult to predict, there is no guaranteed, optimal method of determining EVs. One possibility is the use of a moving regression of the last five years' wool prices (in real terms), rather than setting the index once, or every five years, or every year, based on current prices. The ratio (R) of clean wool price to micron premium is more important than actual prices. It is suggested that the default EVs used currently in WOOLPLAN are appropriate for strong wool Merino flocks. The choice and implications of EVs in other situations are discussed.

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TANG, DAN, YONGJIN WANG, and YUZHEN ZHOU. "COUNTERPARTY RISK FOR CREDIT DEFAULT SWAP WITH STATES RELATED DEFAULT INTENSITY PROCESSES." International Journal of Theoretical and Applied Finance 14, no. 08 (December 2011): 1335–53. http://dx.doi.org/10.1142/s0219024911006863.

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In this paper, the counterparty risk is considered in pricing a Credit Default Swap (abbr. CDS). We adopt an intensity-based reduced form model, in which the default intensity processes of the counterpart and the reference credit are modulated by the credit states of the firms. Two Markov chains are used to describe the credit state processes. We set up a model where the default correlation between the counterpart and the reference is described through the Markov chains. A semi-explicit formula for the pricing of CDS with counterparty risk is obtained. We analyze the impacts of default correlations and the state changes on the CDS price through some numerical experiments.

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Binh, Ki Beom, Seokjin Woo, and Sang Min Lee. "Does CDS Premium Most Predict Sovereign Default Risk?" Journal of Derivatives and Quantitative Studies 22, no. 3 (August 31, 2014): 495–530. http://dx.doi.org/10.1108/jdqs-03-2014-b0005.

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This paper empirically analyzes the price discovery process between Korean sovereign CDS premium, spread of Korean government debt, Won-Dollar currency swap rate, and Won-Dollar FX rate. With the global financial and fiscal crisis, especially in the U.S. and Euro-zone, the interests in sovereign default risk have risen. Interests in CDS, an OTC credit derivative contract based on debt issuer’s default risk, also have increased. A large number of presses have reported that CDS premium would be the best international market indicator for the default risk taken or transferred. However, internationally the CDS market liquidity has not been sufficient enough to validate its properties. Hence, based on empirics, this paper discusses whether Korean sovereign CDS premium can be considered as an appropriate indicator of sovereign credit risk in the Korean economy. Other largely accepted indices which contain the similar information about Korean economic fundamental and Korean external sovereign credit risk are also analyzed and compared: the spread of Korean government debt, Won-Dollar Currency Swap Rate, and Won-Dollar FX rate. Our findings include: (a) in the price discovery process, Won-Dollar spot rate contributes to the price discovery especially most ‘during the financial crisis period’ and the ‘entire period’ (b) Within the period ‘after the financial crisis’, CDS premium and the other indices have mutual influences on the price discovery process higher than the period ‘before the financial crisis’ (c) while Won-Dollar forward rate shows the similar result with Won-Dollar spot rate, NDF rate and CDS premium make the largest mutual influence on price discovery in the period ‘before the financial crisis.’

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Kariya, Takeaki, Yoshiro Yamamura, and Koji Inui. "Empirical Credit Risk Ratings of Individual Corporate Bonds and Derivation of Term Structures of Default Probabilities." Journal of Risk and Financial Management 12, no. 3 (July 23, 2019): 124. http://dx.doi.org/10.3390/jrfm12030124.

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Undoubtedly, it is important to have an empirically effective credit risk rating method for decision-making in the financial industry, business, and even government. In our approach, for each corporate bond (CB) and its issuer, we first propose a credit risk rating (Crisk-rating) system with rating intervals for the standardized credit risk price spread (S-CRiPS) measure presented by Kariya et al. (2015), where credit information is based on the CRiPS measure, which is the difference between the CB price and its government bond (GB)-equivalent CB price. Second, for each Crisk-homogeneous class obtained through the Crisk-rating system, a term structure of default probability (TSDP) is derived via the CB-pricing model proposed in Kariya (2013), which transforms the Crisk level of each class into a default probability, showing the default likelihood over a future time horizon, in which 1545 Japanese CB prices, as of August 2010, are analyzed. To carry it out, the cross-sectional model of pricing government bonds with high empirical performance is required to get high-precision CRiPS and S-CRiPS measures. The effectiveness of our GB model and the S-CRiPS measure have been demonstrated with Japanese and United States GB prices in our papers and with an evaluation of the credit risk of the GBs of five countries in the EU and CBs issued by US energy firms in Kariya et al. (2016a, b). Our Crisk-rating system with rating intervals is tested with the distribution of the ratings of the 1545 CBs, a specific agency’s credit rating, and the ratings of groups obtained via a three-stage cluster analysis.

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Marsh, Ian W., and Wolf Wagner. "News-Specific Price Discovery in Credit Default Swap Markets." Financial Management 45, no. 2 (November 17, 2015): 315–40. http://dx.doi.org/10.1111/fima.12095.

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Catalao-, Margarida. "Bank Mergers, Information, Default and the Price of Credit." Economic Notes 35, no. 1 (February 2006): 49–62. http://dx.doi.org/10.1111/j.0391-5026.2006.00158.x.

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Dai, Wei, and Apostolos Serletis. "Oil Price Shocks and the Credit Default Swap Market." Open Economies Review 29, no. 2 (April 2018): 283–93. http://dx.doi.org/10.1007/s11079-017-9454-z.

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Shi, Xinyan, and Sarah F. Riley. "Mortgage choice, house price externalities, and the default rate." Journal of Housing Economics 26 (December 2014): 139–50. http://dx.doi.org/10.1016/j.jhe.2014.06.001.

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Chatterjee, Satyajit, and Burcu Eyigungor. "Maturity, Indebtedness, and Default Risk." American Economic Review 102, no. 6 (October 1, 2012): 2674–99. http://dx.doi.org/10.1257/aer.102.6.2674.

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We advance quantitative-theoretic models of sovereign debt by proving the existence of a downward sloping equilibrium price function for long-term debt and implementing a novel method to accurately compute it. We show that incorporating long-term debt allows the model to match Argentina's average external debt-to-output ratio, average spread on external debt, the standard deviation of spreads, and simultaneously improve upon the model's ability to account for Argentina's other cyclical facts. We also investigated the welfare properties of maturity length and showed that if the possibility of self-fulfilling rollover crises is taken into account, long-term debt is superior to short-term debt. (JEL E23, E32, F34, O11, O19)

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COONJOBEHARRY, RADHA KRISHN, DÉSIRÉ YANNICK TANGMAN, and MUDDUN BHURUTH. "A TWO-FACTOR JUMP-DIFFUSION MODEL FOR PRICING CONVERTIBLE BONDS WITH DEFAULT RISK." International Journal of Theoretical and Applied Finance 19, no. 06 (September 2016): 1650046. http://dx.doi.org/10.1142/s0219024916500461.

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The current literature on convertible bonds (CBs) comprises only models where the stock price and the interest rate are governed by pure-diffusion processes. This paper fills a gap by developing and implementing a two-factor model where both underlying factors follow jump-diffusion processes, and which also incorporates default risk. We derive the partial integro-differential equation satisfied by the CB price in our model, and solve it by a spectral method based on Chebyshev discretizations and Clenshaw–Curtis quadratures. The conversion, call, and put constraints give rise to a linear complementarity problem, which is solved by an operator-splitting (OS) method. Through numerical experiments, we investigate the effects that the various parameters have on the CB price. In particular, our numerical experiments show that jumps in the stock price have a significant impact on the CB price, while jumps in the interest rate tend to have a minor effect on the price. In general, the dynamics of the stock price have more impact in pricing the CB than the dynamics of the interest rate.

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Choi, Jongyeon. "A Study on the Value of Default (Option) of Purchase Contract." Journal of Derivatives and Quantitative Studies 22, no. 2 (May 31, 2014): 331–49. http://dx.doi.org/10.1108/jdqs-02-2014-b0007.

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This paper start from the question that value of right which is arose from real asset trade. First, organizing option portfolio using this right, then we investigate the correlation about real assets and contracted prices. The results are as follows. When a market is in equilibrium, the call-option value which is owned by seller is greater than the put-option value which is owned by buyer. As a result, present value of contract price is lower than the true value of the asset. Furthermore, this phenomenon is getting deepen when volatility of real estate is greater, expiration date is longer and interest rate is higher.

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BANERJEE, TAMAL, MRINAL K. GHOSH, and SRIKANTH K. IYER. "PRICING CREDIT DERIVATIVES IN A MARKOV-MODULATED REDUCED-FORM MODEL." International Journal of Theoretical and Applied Finance 16, no. 04 (June 2013): 1350018. http://dx.doi.org/10.1142/s0219024913500180.

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Numerous incidents in the financial world have exposed the need for the design and analysis of models for correlated default timings. Some models have been studied in this regard which can capture the feedback in case of a major credit event. We extend the research in the same direction by proposing a new family of models having the feedback phenomena and capturing the effects of regime switching economy on the market. The regime switching economy is modeled by a continuous time Markov chain. The Markov chain may also be interpreted to represent the credit rating of the firm whose bond we seek to price. We model the default intensity in a pool of firms using the Markov chain and a risk factor process. We price some single-name and multi-name credit derivatives in terms of certain transforms of the default and loss processes. These transforms can be calculated explicitly in case the default intensity is modeled as a linear function of a conditionally affine jump diffusion process. In such a case, under suitable technical conditions, the price of credit derivatives are obtained as solutions to a system of ODEs with weak coupling, subject to appropriate terminal conditions. Solving the system of ODEs numerically, we analyze the credit derivative spreads and compare their behavior with the nonswitching counterparts. We show that our model can easily incorporate the effects of business cycle. We demonstrate the impact on spreads of the inclusion of rare states that attempt to capture a tight liquidity situation. These states are characterized by low floating interest rate, high default intensity rate, and high volatility. We also model the effects of firm restructuring on the credit spread, in case of a default.

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Gai, Lorenzo, and Federica Ielasi. "Operational drivers affecting credit risk of mutual guarantee institutions." Journal of Risk Finance 15, no. 3 (May 19, 2014): 275–93. http://dx.doi.org/10.1108/jrf-12-2013-0087.

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Purpose – The purpose of this paper is to investigate the drivers influencing the risk of default on mutual guaranteed loans. The authors aim to verify whether default is influenced by the specific business policies of mutual guarantee institutions (MGIs) and to recommend guidelines for directing their operating management. Design/methodology/approach – The authors analyse the guaranteed portfolios of 19 Italian MGIs and investigate the determinants of the defaulted positions at the end of June 2011. The sample consists of 167,777 guaranteed loans, of which 11,349 are in default. Using regression models, we identify the variables related to the business model of MGIs that are significantly associated with default on their positions. Findings – The defaulted positions of MGIs are significantly correlated with the type of issued guarantees. This condition should be considered in defining product and price policies. Practical implications – The authors identify some critical issues in the risk-taking processes of MGIs. The tested hypothesis highlights the opportunities for the optimisation of guaranteed loan portfolios, which is necessary for reducing the profitability/liquidity pressures of these financial institutions and enhancing their efficiency as instruments for mitigating the effects of credit rationing and promoting the revitalisation of small-and medium-sized enterprises. Originality/value – The results are based on an original and reserved dataset, which is not available in public financial statements or public statistics, but is collected directly from the MGIs that are part of the study.

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Tardelli, P. "Partially informed investors: hedging in an incomplete market with default." Journal of Applied Probability 52, no. 03 (September 2015): 718–35. http://dx.doi.org/10.1017/s0021900200113397.

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In a defaultable market, an investor trades having only partial information about the behavior of the market. Taking into account the intraday stock movements, the risky asset prices are modelled by marked point processes. Their dynamics depend on an unobservable process, representing the amount of news reaching the market. This is a marked point process, which may have common jump times with the risky asset price processes. The problem of hedging a defaultable claim is studied. In order to discuss all these topics, in this paper we examine stochastic control problems using backward stochastic differential equations (BSDEs) and filtering techniques. The goal of this paper is to construct a sequence of functions converging to the value function, each of these is the unique solution of a suitable BSDE.

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Tardelli, P. "Partially informed investors: hedging in an incomplete market with default." Journal of Applied Probability 52, no. 3 (September 2015): 718–35. http://dx.doi.org/10.1239/jap/1445543842.

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In a defaultable market, an investor trades having only partial information about the behavior of the market. Taking into account the intraday stock movements, the risky asset prices are modelled by marked point processes. Their dynamics depend on an unobservable process, representing the amount of news reaching the market. This is a marked point process, which may have common jump times with the risky asset price processes. The problem of hedging a defaultable claim is studied. In order to discuss all these topics, in this paper we examine stochastic control problems using backward stochastic differential equations (BSDEs) and filtering techniques. The goal of this paper is to construct a sequence of functions converging to the value function, each of these is the unique solution of a suitable BSDE.

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Journal articles on the topic 'The default price'

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