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Credit derivatives and risk aversion

In: Econometrics and Risk Management

Author

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  • Tim Leung
  • Ronnie Sircar
  • Thaleia Zariphopoulou

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.

Suggested Citation

  • Tim Leung & Ronnie Sircar & Thaleia Zariphopoulou, 2008. "Credit derivatives and risk aversion," Advances in Econometrics, in: Econometrics and Risk Management, pages 275-291, Emerald Group Publishing Limited.
    • Handle: RePEc:eme:aecozz:s0731-9053(08)22011-6
    DOI: 10.1016/S0731-9053(08)22011-6
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    Cited by:

    1. Xiaolin Wang & Zhaojun Yang & Pingping Zeng, 2023. "Pricing contingent convertibles with idiosyncratic risk," International Journal of Economic Theory, The International Society for Economic Theory, vol. 19(3), pages 660-693, September.

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