EconPapers    
Economics at your fingertips  
 

Credit Risk Modeling: A General Framework

Ren-Raw Chen ()
Additional contact information
Ren-Raw Chen: Fordham University

Chapter 75 in Encyclopedia of Finance, 2022, pp 1727-1763 from Springer

Abstract: Abstract The two well-known approaches for credit risk modeling, structural and reduced form approaches, have their advantages and disadvantages. Due to the fundamentally different assumptions of the two approaches, the structural models are used for default prediction that focuses on equity prices and reduced form models are used for credit derivatives pricing that focuses on debt values. In this chapter, via a simple discrete binomial structure, we provide a unified view of the two approaches. In particular, in our formulation, the pricing formulas for risky debts are identical under the two approaches. The two approaches differ in only the recovery assumption. This result makes comparison of various models empirically possible. We demonstrate, in a credit derivative example that is sensitive to the recovery assumption, how different recovery assumptions impact its prices.

Keywords: Interest Rate; Credit Default Swap; Default Probability; Bond Price; Reduce Form Model (search for similar items in EconPapers)
Date: 2022
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-91231-4_75

Ordering information: This item can be ordered from
http://www.springer.com/9783030912314

DOI: 10.1007/978-3-030-91231-4_75

Access Statistics for this chapter

More chapters in Springer Books from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().

 
Page updated 2025-04-02
Handle: RePEc:spr:sprchp:978-3-030-91231-4_75