Credit Derivatives and Risk Aversion

@inproceedings{Leung2007CreditDA,
  title={Credit Derivatives and Risk Aversion},
  author={Tim Leung and Ronnie Sircar and Thaleia Zariphopoulou},
  year={2007}
}
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… CONTINUE READING
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