CREDIT RISK MODELS
Updated A.Y. 2017-2018
Credit Risk Models
M.Sc. Finance and Banking
Prof. Stefano Herzel
This course, addressed to advanced Master and PhD students, provides an introduction to modeling, measuring and pricing credit risk.
It is divided into two parts: sovereign debt and corporate debt.
It will show how to model corporate and sovereign credit risk by applying structural and intensity based models.
The theory requires a fair understanding of some tools from probability and stochastic processes.
I will provide
The course is elective, and will be offered during the second semester, if there are enough students interested, over six consecutive weeks, for a total of 36 hours of lectures.
Upon completion of the course students will know and understand the following topics:
1. Corporate debt
• Theory of the Firm (Modigliani-Miller)
• Structural models for Corporate Credit Risk (Merton and Black-Cox models)
• Evaluation of Subordinated Debt
• Estimating Asset Value and Asset Volatility from Observed Equity Prices
• Distance to Default, the KMV approach
• Endogenous Default Boundaries and Optimal Capital Structure (the Leland model)
2. Sovereign debt
Short rate models
Libor Market Model
Swap Market Model
• Introduction to Poisson Processes • Modeling the default intensity
• Sovereign Credit Risk
• Bond and CDS pricing
Students will apply their knowledge to real market data, using the platform Eikon-Datastream and implementing the models using Matlab.
Basic knowledge of:
probability and stochastic calculus (e.g. Brownian Motion and Ito’s Lemma)
theory of arbitrage asset pricing (e.g. the Black Scholes model).
risk-free interest rate model (e.g. the Vasicek model)
Some familiarity with one programming language (e.g. Matlab)
All prerequisites are covered in the “Asset Pricing” course.
Textbook: David Lando, Credit Risk Modeling Theory and Applications,
The final grade will be determined by class participation (25%) and a final written exam (75%)