Social Science

Risk Dynamics Modeling and Credit Valuation Adjustment

Authors: David Lee
Comments: 25 Pages.

A broad range of financial products bear credit risk. This paper presents an integrated approach to model credit risk. We focus on the impact of default dependence and rating migration on derivative security valuation, as correlated default risk is one of the most pervasive threats in financial markets. The numerical study shows that the model-implied credit spreads are very close to the market observed credit spreads. Both have the same patterns and trends. The numerical study also indicates that the calculated default correlation is consistent with the market default correlation observed, implying that the model is accurate for computing the market value of credit risk.
Category: Social Science