Trading Credit Derivatives

Tim Leung and Xin Li

Chapter 7 in Optimal Mean Reversion Trading:Mathematical Analysis and Practical Applications, 2016, pp 163-199 from World Scientific Publishing Co. Pte. Ltd.

Abstract: In credit derivatives trading, one important question is how the market compensates investors for bearing credit risk. A number of related studies have examined analytically and empirically the structure of default risk premia inferred from the market prices of corporate bonds, credit default swaps, and multi-name credit derivatives. A major risk premium component is the mark-to-market risk premium which accounts for the fluctuations in default risk. In addition, there is the event risk premium (or jump-to-default risk premium) that compensates for the uncertain timing of the default event…

Keywords: Trading Strategies; Mean Reversion; Optimal Stopping; Optimal Switching; Stop-Loss; Stochastic Processes; Exchange-Traded Funds (ETFS); Ornstein–Uhlenbeck Model; Cox-Ingersoll-Ross (CIR) Model (search for similar items in EconPapers)
Date: 2016
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