Up and down credit risk

Tomasz Bielecki, Stephane Crepey and Monique Jeanblanc

Quantitative Finance, 2010, vol. 10, issue 10, 1137-1151

Abstract: This paper discusses the main modeling approaches that have been developed for handling portfolio credit derivatives, with a focus on the question of hedging. In particular, the so-called top, top down and bottom up approaches are considered. We give some mathematical insights regarding the fact that information, namely the choice of a relevant model filtration, is the major modeling issue. In this regard, we examine the notion of thinning that was recently advocated for the purpose of hedging a multi-name derivative by single-name derivatives. We then illustrate by means of numerical simulations (semi-static hedging experiments) why and when the portfolio loss process may not be a 'sufficient statistic' for the purpose of valuation and hedging of portfolio credit risk.

Keywords: Credit risk; Computational finance; Financial mathematics; Model calibration (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (9)

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DOI: 10.1080/14697680903382776

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