The Oxford Handbook of Credit Derivatives

The Oxford Handbook of Credit Derivatives

The Oxford Handbook of Credit Derivatives

The Oxford Handbook of Credit Derivatives

Synopsis

From the late nineties, the spectacular growth of a secondary market for credit through derivatives has been matched by the emergence of mathematical modelling analysing the credit risk embedded in these contracts. This book aims to provide a broad and deep overview of this modelling, covering statistical analysis and techniques, modelling of default of both single and multiple entities, counterparty risk, Gaussian and non-Gaussian modelling, and securitisation. Both reduced-form and firm-value models for the default of single entities are considered in detail, with extensive discussion of both their theoretical underpinnings and practical usage in pricing and risk. For multiple entity modelling, the now notorious Gaussian copula is discussed with analysis of its shortcomings, as well as a wide range of alternative approaches including multivariate extensions to both firm-value and reduced form models, and continuous-time Markov chains. One important case of multiple entities modelling - counterparty risk in credit derivatives - is further explored in two dedicated chapters. Alternative non-Gaussian approaches to modelling are also discussed, including extreme-value theory and saddle-point approximations to deal with tail risk. Finally, the recent growth in securitisation is covered, including house price modelling and pricing models for asset-backed CDOs. The current credit crisis has brought modelling of the previously arcane credit markets into the public arena. Lipton and Rennie with their excellent team of contributors, provide a timely discussion of the mathematical modelling that underpins both credit derivatives and securitisation. Though technical in nature, the pros and cons of various approaches attempt to provide a balanced view of the role that mathematical modelling plays in the modern credit markets. This book will appeal to students and researchers in statistics, economics, and finance, as well as practicioners, credit traders, and quantitative analysts.

Excerpt

Recently two series of Oxford Handbooks covering financial topics have been merged into one under a single editorship – those in Finance found under Business and Economics and those in Quantitative Finance found under Mathematics. This is as it should be, for in spite of all the accusations regarding their role in the recent crisis and recession, financial services are both necessary and critical to the successful development of a global economy facing environmental and pension crises on top of the current one. It can also be argued that banking, insurance and fund management are the last post war industries to go “high tech” and that the esoteric topics involved need exposition to a more general audience than simply that of their creators. The aim of this handbook series is therefore to cover recent developments in financial services, institutions and markets in an up to date, accurate and comprehensive manner which is clear and comprehensible to the interested reader. This will be achieved by careful choice of editors for, and exacting selection of contributors to, each handbook.

It is my hope that over time the volumes in this series will help to create a better understanding of financial topics by the educated public, including financial services managers, regulators and legislators. Such an understanding appeared to be lacking in the run-up to the recent crisis, but it will be crucial to successful management of the global economy in the future.

Michael Dempster . . .

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