 Credit DerivativesJohn Hull and Alan White () Chapter Chapter 20 in Handbook of the Economics of Finance, 2013, vol. 2, pp 1363-1396 from Elsevier Abstract: This chapter explains how the main types of credit derivatives work and how they are valued. Central to the valuation of credit derivatives is an estimation of the probability that reference entities will default. The chapter discusses both the risk-neutral probabilities of default implied from credit spreads and the real-world (physical) default probabilities calculated from historical data, such as that provided by rating agencies. The academic literature attempting to explain the difference between these two probability estimates is summarized. The characteristics of credit default swaps, which are the most common type of single-name derivatives, are discussed, and procedures used to determine the contract values are explained. A similar presentation is provided for collateralized debt obligations, which are the most common type of multi-name credit derivatives. The chapter ends with a discussion of the economics of the collateralized debt obligation market and the role that these products played in the US financial crisis, which started in 2007. Keywords: Credit; Credit risk; Default; Default probability; Credit default Swap; CDS; Collateralized debt obligations; CDO; Synthetic CDO; Index CDO; Asset backed security; ABS; Copula; Gaussian copula; Subprime mortgage (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finchp:2-b-1363-1396 DOI: 10.1016/B978-0-44-459406-8.00020-2 Access Statistics for this chapter More chapters in Handbook of the Economics of Finance from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.