Credit derivatives and risk aversion

Tim Leung, Ronnie Sircar, Thaleia Zariphopoulou

Research output: Chapter in Book/Report/Conference proceedingChapter

7 Scopus citations

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.

Original languageEnglish (US)
Title of host publicationEconometrics and Risk Management
EditorsJean-Pierre Fouque, Thomas Fomby, Knut Solna
Pages275-291
Number of pages17
DOIs
StatePublished - Dec 3 2008

Publication series

NameAdvances in Econometrics
Volume22
ISSN (Print)0731-9053

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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    Leung, T., Sircar, R., & Zariphopoulou, T. (2008). Credit derivatives and risk aversion. In J-P. Fouque, T. Fomby, & K. Solna (Eds.), Econometrics and Risk Management (pp. 275-291). (Advances in Econometrics; Vol. 22). https://doi.org/10.1016/S0731-9053(08)22011-6