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Efficient Pricing of Default Risk: Different approaches for a single goal

by Damiano Brigo of Banca IMI, and
Massimo Morini of the University of Milan Bicocca


Abstract: With the rapid development of the credit derivatives market, efficient pricing of default has become an extremely important issue for the credit risk management of banks and other investors. We consider here some of the opportunities and problems that the development of this market poses to quantitative research in academia and industry. We describe different modeling choices pointing out the practical pros and cons of the different frameworks. For all different frameworks, we present innovative solutions allowing both computational efficiency and high consistency with the increasingly liquid credit reference market, the market of credit default swaps.

JEL Classification: G13.

Keywords: Credit Derivatives, Credit Default Swaps, Structural models, Intensity models.

Published in: Journal of Financial Transformation, Vol. 13, (2005), pp. 151-160.

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