Credit derivatives and risk aversion

Tim Leung, Ronnie Sircar and Thaleia Zariphopoulou

A chapter in Econometrics and Risk Management, 2008, pp 275-291 from Emerald Group Publishing Limited

Abstract: We discuss the valuation of credit derivatives in extreme regimes such as when the time-to-maturity is short, or when payoff is contingent upon a large number of defaults, as with senior tranches of collateralized debt obligations. In these cases, risk aversion may play an important role, especially when there is little liquidity, and utility-indifference valuation may apply. Specifically, we analyze how short-term yield spreads from defaultable bonds in a structural model may be raised due to investor risk aversion.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-9053(08)22011-6

DOI: 10.1016/S0731-9053(08)22011-6

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