Interest Default Research Articles

Implied Bond and Derivative Prices Based on Non-Linear Stochastic Interest Rate Models

In this paper we expand the Box Method of Sorwar et al. (2007) to value both default free bonds and interest rate contingent claims based on one factor non-linear interest rate models. Further we propose a one-factor non-linear interest rate model that incorporates features suggested by recent research. An example shows the extended Box Method works well in practice.

Intra-Bank Counterparty Credit Risk Modeling Under Basel II: What is New?

This paper first describes the treatment of counterparty credit risk of OTC derivatives under Basel II. It present Standard Method SM and Current Exposure Method CEM of calculating EAD. It also offer evaluation of those methods and their shortfalls. Second, a model of counterparty credit risk with correlation between default probabilities and interest rate was presented. The relevancy of such measure is particularly appropriate given the recent defaults in some of the major banks. Furthermore, the credit hyprid product with an interest rate underlying assumes the inclusion of credit default probability to value the optional part in counterparty risk. Those products are extensively used by banks now and proper valuation should take counterparty credit risk into account.

Saliency does not account for fixations to eyes within social scenes

We assessed the role of saliency in driving observers to fixate the eyes in social scenes. Saliency maps ( Itti & Koch, 2000) were computed for the scenes from three previous studies. Saliency provided a poor account of the data. The saliency values for the first-fixated locations were extremely low and no greater than what would be expected by chance. In addition, the saliency values for the eye regions were low. Furthermore, whereas saliency was no better at predicting early saccades than late saccades, the average latency to fixate social areas of the scene (e.g., the eyes) was very fast (within 200 ms). Thus, visual saliency does not account for observers’ bias to select the eyes within complex social scenes, nor does it account for fixation behavior in general. Instead, it appears that observers’ fixations are driven largely by their default interest in social information.

Alternative Defaultable Term Structure Models

The objective of this paper is to consider defaultable term structure models in a general setting beyond standard risk-neutral models. Using as numeraire the growth optimal portfolio, defaultable interest rate derivatives are priced under the real-world probability measure. Therefore, the existence of an equivalent risk-neutral probability measure is not required. In particular, the real-world dynamics of the instantaneous defaultable forward rates under a jump-diffusion extension of a HJM type framework are derived. Thus, by establishing a modelling framework fully under the real-world probability measure, the challenge of reconciling real-world and risk-neutral probabilities of default is deliberately avoided, which provides significant extra modelling freedom. In addition, for certain volatility specifications, finite dimensional Markovian defaultable term structure models are derived. The paper also demonstrates an alternative defaultable term structure model. It provides tractable expressions for the prices of defaultable derivatives under the assumption of independence between the discounted growth optimal portfolio and the default-adjusted short rate. These expressions are then used in a more general model as control variates for Monte Carlo simulations of credit derivatives.

Alternative Defaultable Term Structure Models

The objective of this paper is to consider defaultable term structure models in a general setting beyond standard risk-neutral models. Using as numeraire the growth optimal portfolio, defaultable interest rate derivatives are priced under the real-world probability measure. Therefore, the existence of an equivalent risk-neutral probability measure is not required. In particular, the real-world dynamics of the instantaneous defaultable forward rates under a jump-diffusion extension of a HJM type framework are derived. Thus, by establishing a modelling framework fully under the real-world probability measure, the challenge of reconciling real-world and risk-neutral probabilities of default is deliberately avoided, which provides significant extra modelling freedom. In addition, for certain volatility specifications, finite dimensional Markovian defaultable term structure models are derived. The paper also demonstrates an alternative defaultable term structure model. It provides tractable expressions for the prices of defaultable derivatives under the assumption of independence between the discounted growth optimal portfolio and the default-adjusted short rate. These expressions are then used in a more general model as control variates for Monte Carlo simulations of credit derivatives.

Leistungsverweigerung der gesetzlichen Krankenversicherung - anwaltliche Strategien

The article presents some strategies that have been either tested or are worthy of consideration in a dispute conducted through lawyers with health insurance funds when benefits are unjustifiably denied to insurance holders. There are hardly any satisfactory legal instruments which can be used against the tardy examination of benefit claims by health insurance funds. What could be considered here is an assertion of default interest. The reimbursement of costs can only be considered in the event of a final refusal by the health insurance fund or in the case of benefits that cannot be postponed. At any rate, a decision on the part of the health insurance fund should be enforced and the results awaited. The consequences of the decision of the Federal Constitutional Court of 5.12.2005 are presented in brief. The relationship between the doctor and the medical service of the health insurance fund (MDK) is discussed. In the event of a benefit review by the MDK, the prescribing doctor has therapeutic latitude vis-a-vis the health insurance fund and the reviewing doctors of the MDK. All that the MDK does here is check justifiability. The insured person's right to choice in terms of the implementation of the benefit in a particular therapy centre is subject to the suitability of the facility and to affordability. According to the practice of the social security courts, it is also subject to the contractual connection of the facility to the insurance body responsible. Then there is a brief examination of claims for damages by insured parties and the right to action of the public service provider.

The Lévy Libor model with default risk

In this paper we present a model for the dynamic evolution of the term structure of default-free and defaultable interest rates. The model is set in the Libor market model framework but in contrast to the classical diffusion-driven setup, its dynamics are driven by a time-inhomogeneous Levy process which allows us to better capture the real-world dynamics of credit spreads. We present necessary and sufficient conditions for absence of arbitrage in the dynamics of the spreads, and provide pricing formulae for defaultable bonds, credit default swaps and options on credit default swaps in this setup.

On the simulation of portfolios of interest rate and credit risk sensitive securities

We discuss extensions of reduced-form and structural models for pricing credit risky securities to portfolio simulation and valuation. Stochasticity in interest rates and credit spreads is captured via reduced-form models and is incorporated with a default and migration model based on the structural credit risk modelling approach. Calculated prices are consistent with observed prices and the term structure of default-free and defaultable interest rates. Three applications are discussed: (i) study of the inter-temporal price sensitivity of credit bonds and the sensitivity of future portfolio valuation with respect to changes in interest rates, default probabilities, recovery rates and rating migration, (ii) study of the structure of credit risk by investigating the impact of disparate risk factors on portfolio risk, and (iii) tracking of corporate bond indices via simulation and optimisation models. In particular, we study the effect of uncertainty in credit spreads and interest rates on the overall risk of a credit portfolio, a topic that has been recently discussed by Kiesel et al. [The structure of credit risk: spread volatility and ratings transitions. Technical report, Bank of England, ISSN 1268-5562, 2001], but has been otherwise mostly neglected. We find that spread risk and interest rate risk are important factors that do not diversify away in a large portfolio context, especially when high-quality instruments are considered.

An Empirical Examination of the Classical Theory of Corporate Security Valuation

This paper tests the main implications of the classical Black-Scholes-Merton theory of corporate security valuation. Data on the debt of companies with a single outstanding bullet bond is used to focus on the cleanest possible application of the theory. The basic Merton model is tested first. Then we offer the first systematic tests of whether observed pricing errors can be mitigated by more complicated models that admit default before maturity, stochastic interest rates and differential recovery rates. The models are tested under a variety of assumed conditions to examine the effects of possible mis-measurement of hard-to-measure parameters. The relatively successful configurations of the Merton model produce mean absolute errors between 80 and 90 basis points. Errors are related to coupon and time to maturity but are not related to credit rating. Evidence on the effect of firm size is equivocal. The Longstaff-Schwartz model's ability to accommodate early default and stochastic risk-free interest rates does not improve prediction accuracy in our sample. Efforts to improve accuracy through use of each firm's industry-average recovery rate were similarly unavailing.

Real options: a commercial bank lending application

We extend existing real‐option theories by incorporating the stochastic interaction between unit price and cost, applied in commercial bank lending. We further empirically examine an implication derived from the model as to the relationship between lending practices in the banking industry and future uncertainties. We focus on lending institutions to analyze the effect of uncertainties on lending (investment) decisions for several reasons. First, it is easy to identify the main sources of uncertainties for the assets and liabilities of the financial institutions – default risk and interest rate changes. Second, the commercial lending institution provides a unique environment in which the correlation between investment costs (liabilities) and output (loans) price is quite high and positive since both depend heavily on interest rates. Finally, bank loans may be subject to a high degree of irreversibility (e.g., substantial loss in defaults). The real option model explains the relationship between levels of lending, loan‐toassets, and the uncertainties regarding interest income and expenses. The correlation between interest income and loan expenses, in particular, explains cross‐sectional loan activities, which confirms the importance of risk management. These results also show that as banks increase one type of risk, e.g., interest rate risk, they decrease another type of risk, e.g., lending risk as measured by loans/assets.

Default risk in a market model

This paper presents a theoretical model of default risk in the context of the “market” model approach to interest rate dynamics. We propose a model for finite-interval interest rates (such as LIBOR) which explicitly takes into account the possibility of default through the influence of a point process with deterministic intensity. We relate the defaultable interest rate to the non-defaultable interest rate and to the credit risk characteristics default intensity and recovery rate. We find that the spread between defaultable and non-defaultable rate depends on the non-defaultable rate even when the default intensity is deterministic. Prices of a cap on the defaultable rate and of a credit spread option are derived. We consider swaps with unilateral and bilateral default risk and derive the fair fixed swap rate in both cases. Under the condition that both counterparties are of the same risk class, we show that for a monotonously increasing term structure the swap rate for a defaultable swap will lie below the swap rate for a swap without default risk.

Term structure modelling of defaultable bonds

In this paper we present a model of the development of the term structure of defaultable interest rates that is based on a multiple-defaults model. Instead of modelling a cash payoff in default we assume that defaulted debt is restructured and continues to be traded.

THE CONSEQUENCES OF COSTLY DEFAULT

This paper investigates the consequences of assuming that default on loans or corporate debt is costly; that is, the act of default imposes a deadweight cost on the economy. The analysis deals with two simple capital market models. Conditions for capital market equilibrium nominal interest rates and probability of default to exist are given and the comparative statics of these equilibrium variables with respect to changes in expectations, productivity of investment, cost of default and riskless interest rates are examined. In many cases these comparative static results are unambiguous in sign.

Mortgages. Power of Mortgagee to Accelerate Debt upon Accidental Interest Default

Mortgages. Power of Mortgagee to Accelerate Debt upon Accidental Interest Default