FIN-03-009 |
NYU Stern School of Business |
February 2003
Edward I. Altman and Mario Onorato
ABSTRACT
In recent years, credit risk has played a key role in risk management issues. Practitioners, academics
and regulators have been fully involved in the process of developing, studying and analysing credit risk
models in order to find the elements which characterize a sound risk management system. In this paper
we present an integrated model, based on a reduced pricing approach, for market and credit risk. Its
main features are those of being mark to market and that the spread term structure by rating class is
contingent on the seniority of debt within an arbitrage-free framework. We introduce issues such as, the
integration of market and credit risk, the use of stochastic recovery rates and recovery by seniority.
Moreover, we will characterise default risk by estimating migration risk through a "mortality rate",
actuarial based, approach. The resultant probabilities will be the base for determining multi-period risk-neutral
transition probability that allow pricing of risky debt in the trading and banking book.
Classification: C15, C69, G12, H63
Edward I. Altman
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0709
Email: ealtman@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~ealtman
Mario Onorato
Institution: Cass Business School, City University 106, Bunhill Row, London, EC2Y 8TZ, U.K.
Telephone: 44 207 0408698
Email: M.F.Onorato@city.ac.uk
To download a copy of this paper click here
To request a copy of this paper click here
|