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Credit risk models in the South African context

Credit risk models in the South African context L Smit#. B Swart* and F van Niekerk# 1. INTRODUCTION Sundaresan, 1993; Longstaff and Schwartz, 1995; Shimko, Tejima and van Deventer, 1993). Credit risk is the risk that one party to a financial transaction who is under obligation to make a An alternative approach to this "structural" or payment, fails to do so. We specifically consider the "contingent claims analysis" approach, is the "reduced risk that a company issuing a fixed-income instrument form" approach. Such models (Jarrow and Turnbull, (bond), defaults. Such risk needs to be quantified so 1995; Jarrow, Lando and Turnbull, 1997) impose that contracts can be hedged and priced. assumptions directly on the bankruptcy and recovery rate processes instead of on the value of the firm. The first class of credit risk models, based on Merton, imposes assumptions on the evolution of the firm's 2. THE MODEL OF MERTON value and its liability structure. These structural are based on the Black-Scholes pricing models With the dynamics of the value V of the firm given by framework. The idea is to obtain a partial differential equation which can be solved (analytically or ... ( 1) numerically) to find a price for default-risky bonds. From this we can http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Investment Analysts Journal Taylor & Francis

Credit risk models in the South African context

Smit, L; Swart, B; Niekerk, F van
Investment Analysts Journal , Volume 32 (57): 6 – Jan 1, 2003
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Publisher
Taylor & Francis
Copyright
© 2003 Taylor and Francis Group, LLC
ISSN
2077-0227
eISSN
1029-3523
DOI
10.1080/10293523.2003.11082447
Publisher site
See Article on Publisher Site

Abstract

L Smit#. B Swart* and F van Niekerk# 1. INTRODUCTION Sundaresan, 1993; Longstaff and Schwartz, 1995; Shimko, Tejima and van Deventer, 1993). Credit risk is the risk that one party to a financial transaction who is under obligation to make a An alternative approach to this "structural" or payment, fails to do so. We specifically consider the "contingent claims analysis" approach, is the "reduced risk that a company issuing a fixed-income instrument form" approach. Such models (Jarrow and Turnbull, (bond), defaults. Such risk needs to be quantified so 1995; Jarrow, Lando and Turnbull, 1997) impose that contracts can be hedged and priced. assumptions directly on the bankruptcy and recovery rate processes instead of on the value of the firm. The first class of credit risk models, based on Merton, imposes assumptions on the evolution of the firm's 2. THE MODEL OF MERTON value and its liability structure. These structural are based on the Black-Scholes pricing models With the dynamics of the value V of the firm given by framework. The idea is to obtain a partial differential equation which can be solved (analytically or ... ( 1) numerically) to find a price for default-risky bonds. From this we can

Journal

Investment Analysts Journal – Taylor & Francis

Published: Jan 1, 2003

References

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  • Pricing derivatives on financial securities subject to credit risk.
  • A Markov model for the term structure of credit risk spreads.
  • Does default risk in coupons affect the valuation of corporate bonds?—A contingent claims model.
  • Interest rate volatility and term structure.
  • On the pricing of corporate debt: The risk structure of interest rates.
  • The pricing of risky debt when interest rates are stochastic.