Credit Risk Modeling

The chapter gives a broad outline of the central themes of credit risk modeling starting with the modeling of default probabilities, ratings and recovery.We present the two main frameworks for pricing credit risky instruments and credit derivatives. The key credit derivative - the Credit Default Swap - is introduced. The premium on this contract provides a meausure of the credit spread of the reference issuer. We then provide some key empirical works looking at credit spreads thorugh CDS contracts and bonds and finish with a description of the role of correlation in credit risk modeling.

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