Kenneth J. Singleton is the C.O.G. Miller Distinguished Professor of Finance at the Graduate School of Business, Stanford University.
Review
This is certainly the best book on credit risk available on the market for academics and practitioners. I recommend the book to academics and professionals, and also for the teaching of credit risk at Masters and PhD levels.
Summary
Overall, the book succeeds in motivating the reader to consider the alternative approaches to modeling credit risk. . . . Although the book is technically rigorous, the presentation is straightforward so even a casual reader will learn from the authors' insights. Moreover, the seasoned analyst will benefit from the concise summary of many existing techniques.
Table of Contents
Preface xi
Acknowledgments xiii
1. Introduction 1 1.1. A Brief Zoology of Risks 3 1.2. Organization of Topics 7
2. Economic Principles of Risk Management 12 2.1. What Types of Risk Count Most?13 2.2. Economics of Market
Risk 15 2.3. Economic Principles of Credit Risk 26 2.4. Risk Measurement 29 2.5. Measuring Credit Risk 38
3. Default Arrival: Historical Patterns and Statistical Models 43 3.1. Introduction 43 3.2. Structural Models
of Default Probability 53 3.3. From Theor to Practice: Using Distance to Default to Predict Default 57 3.4. Default
Intensity 59 3.5. Examples of Intensity Models 64 3.6. Default-Time Simulation 72 3.7. Statistical Prediction of
Bankruptcy 74
4. Ratings Transitions: Historical Patterns and Statistical Models 85 4.1. Average Transition Frequencies 85
4.2. Ratings Risk and the Business Cycle 87 4.3. Ratings Transitions and Aging 91 4.4. Ordered Probits of Ratings
92 4.5. Ratings as Markov Chains 94 5. Conceptual Approaches to Valuation of Default Risk 100
5.1. Introduction 100 5.2. Risk-Neutral versus Actual Probabilities 102 5.3. Reduced-Form Pricing 106 5.4. Structural
Models 112 5.5. Comparisons of Model-Implied Spreads 114 5.6. From Actual to Risk-Neutral Intensities 118
6. Pricing Corporate and Sovereign Bonds 122 6.1. Uncertain Recover 122 6.2. Reduced-Form Pricing with Recover
125 6.3. Ratings-Based Models of Credit Spreads 137 6.4. Pricing Sovereign Bonds 146
7. Empirical Models of Defaultable Bond Spreads 156 7.1. Credit Spreads and Economic Activity 156 7.2. Reference
Curves for Spreads 162 7.3. Parametric Reduced-Form Models 166 7.4. Estimating Structural Models 169 7.5. Parametric
Models of Sovereign Spreads 171
8. Credit Swaps 173 8.1. Other Credit Derivatives 173 8.2. The Basic Credit Swap 175 8.3. Simple Credit-Swap
Spreads 178 8.4. Model-Based CDS Rates 185 8.5. The Role of Asset Swaps 190
9. Optional Credit Pricing 194 9.1. Spread Options 194 9.2. Callable and Convertible Corporate Debt 201 9.3.
A Simple Convertible Bond Pricing Model 215
11. Collateralized Debt Obligations 250 11.1. Introduction 250 11.2. Some Economics of CDOs 252 11.3. Default-Risk
Model 255 11.4. Pricing Examples 260 11.5. Default Loss Analytics 271 11.6. Computation of Diversity Scores 280
12. Over-the-Counter Default Risk and Valuation 285 12.1. Exposure 285 12.2. OTC Credit Risk Value Adjustments
295 12.3. Additional Swap Credit Adjustments 304 12.4. Credit Spreads on Currency Swaps 311
13. Integrated Market and Credit Risk Measurement 314 13.1. Market Risk Factors 315 13.2. Delta-Gamma for Derivatives
with Jumps 326 13.3. Integration of Market and Credit Risk 332 13.4. Examples of VaR with Credit Risk 334
Appendix A Introduction to Affine Processes 346
Appendix B Econometrics of Affine Term-Structure Models 362
Appendix C HJM Spread Curve Models 367
References 371
Index 385