Credit Correlation

Theory and Practice

Youssef Elouerkhaoui

• Publisher: Palgrave Macmillan
• Year: 2017
• Print ISBN: 9783319609720
• eBook ISBN: 9783319609737
• Topic: Business
• Subtopic: Financial Services
• Index: Business

This book provides an advanced guide to correlation modelling for credit portfolios, providing both theoretical underpinnings and practical implementation guidance. The book picks up where pre-crisis credit books left off, offering guidance for quants on the latest tools and techniques for credit portfolio modelling in the presence of CVA (Credit Value Adjustments). Written at an advanced level, it assumes that readers are familiar with the fundamentals of credit modelling covered, for example, in the market leading books by Schonbucher (2003) and O'Kane (2008). Coverage will include the latest default correlation approaches; correlation modelling in the 'Marshall-Olkin' contagion framework, in the context of CVA; numerical implementation; and pricing, calibration and risk challenges.

The explosive growth of credit derivatives markets in the early-to-mid 000's was bought to a close by the 2007 financial crisis, where these instruments were held largely to blame for the economic downturn. However, in the wake of increased regulation across all financial instruments and the challenge of buying and selling bonds in large amounts, credit derivatives have once again been found to be the answer and the market has grown significantly.

Written by a practitioner for practitioners, this book will also interest researchers in mathematical finance who want to understand how things happen and work 'on the floor'. Building the reader's knowledge from the ground up, and with numerous real life examples used throughout, this book will prove a popular reference for anyone with a mathematical mind interested credit markets.

Table of contents

• Preface
• Acknowledgements
• Contents
• List of Figures
• 1 Introduction and Context
• Theoretical Tools
• 2 Mathematical Fundamentals
• 3 Expectations in the Enlarged Filtration
• 4 Copulas and Conditional Jump Diffusions
• Correlation Models: Practical Implementation
• 5 Correlation Demystified: A General Overview
• 6 Correlation Skew: A Black-Scholes Approach
• 7 An Introduction to the Marshall-Olkin Copula
• 8 Numerical Tools: Basket Expansions
• 9 Static Replication
• 10 The Homogeneous Transformation
• 11 The Asymptotic Homogeneous Expansion
• 12 The Asymptotic Expansion
• 13 CDO-Squared: Correlation of Correlation
• 14 Second Generation Models: From Flat to Correlation Skew
• 15 Third Generation Models: From Static to Dynamic Models
• Advanced Topics in Pricing and Risk Management
• 16 Pricing Path-Dependent Credit Products
• 17 Hedging in Incomplete Markets
• 18 Min-Variance Hedging with Carry
• 19 Correlation Calibration with Stochastic Recovery
• The Next Challenge
• 20 New Frontiers in Credit Modelling: The CVA Challenge
• Bibliography
• References