The credit valuation adjustment (CVA) on an over-the-counter derivative transaction is the price of the risk associated with the potential default of the counterparties to the trade. This dissertation provides an introduction to the concept of CVA, beginning with the required backdrop of counterparty risk and the basics of default risk modelling. Right and wrong way risks are central themes of the dissertation. A model for the pricing of both the unilateral and the bilateral CVA on a credit default swap (CDS) is implemented. Each step of this process is explained thoroughly. Results are reported and discussed for a range of parameters. The trends observed in the CDS CVA numbers produced by the model are all justified and the right and wrong way nature of the exposures captured. In addition, the convergence and stability of the numerical schemes utilised are shown to be appropriate. A case study, in which the model is applied to a set of market scenarios, concludes the dissertation. Since the field is far from established, a number of areas are suggested for further research. Copyright / Dissertation (MSc)--University of Pretoria, 2012. / Mathematics and Applied Mathematics / unrestricted

Submitted by Renata Junqueira (repajunqueira@hotmail.com) on 2016-09-12T19:57:23Z No. of bitstreams: 1 Dissertação - Renata de Andrade Junqueira Ribeiro.pdf: 1064886 bytes, checksum: baad34290f965fc38c8c027553d693be (MD5) / Approved for entry into archive by GILSON ROCHA MIRANDA (gilson.miranda@fgv.br) on 2016-09-21T14:11:27Z (GMT) No. of bitstreams: 1 Dissertação - Renata de Andrade Junqueira Ribeiro.pdf: 1064886 bytes, checksum: baad34290f965fc38c8c027553d693be (MD5) / Approved for entry into archive by Marcia Bacha (marcia.bacha@fgv.br) on 2016-09-23T17:12:07Z (GMT) No. of bitstreams: 1 Dissertação - Renata de Andrade Junqueira Ribeiro.pdf: 1064886 bytes, checksum: baad34290f965fc38c8c027553d693be (MD5) / Made available in DSpace on 2016-09-23T17:12:24Z (GMT). No. of bitstreams: 1 Dissertação - Renata de Andrade Junqueira Ribeiro.pdf: 1064886 bytes, checksum: baad34290f965fc38c8c027553d693be (MD5) Previous issue date: 2016-08-29 / This paper uses an econometric model and identifies the relation between the perception of mining company Vale S.A.’s credit risk, measured by Credit Default Swap (CDS), and earnings surprises, measured by the difference between reported earnings per share (EPS) and EPS expected by market analysts. Conclusion is that a surprise in earning announcement significantly impacts Vale’s CDS and negative surprises tend to have higher influence than positive ones. Results suggest caution upon announcing future goals, since maintaining market expectations at reasonable levels could prevent sudden increases in funding costs. / Neste trabalho, é utilizado um modelo econométrico reduzido a fim de identificar a relação entre a percepção de risco de crédito da empresa mineradora Vale S.A., medida pelo Credit Default Swap (CDS), e a surpresa na divulgação de resultado, medida pela diferença entre o lucro por ação divulgado e o esperado pelos analistas de mercado. Conclui-se que uma surpresa no anúncio do resultado influencia significativamente o CDS da Vale e as surpresas negativas têm influência maior que as positivas. Os resultados sugerem cautela no anúncio de metas futuras, uma vez que a manutenção das expectativas de mercado em patamares moderados ajuda a evitar aumentos súbitos no custo de captação.

Credit Default Swaps have become a large part of financial markets and recently the center of debate between academics and regulators alike. Transferring the techniques to measure information flow between the CDS market and stock markets presented by Acharya and Johnson (2007), this paper looks at the relationship between a countries sovereign CDS spread level and its predominate stock exchange. Under the back drop of the Greek Credit Crisis in Spring of 2010 I measure contagion effects in the Euro Zone comparing the level of Granger causality significance between the stock and CDS market. I find that the greatest information flow from the CDS market to the stock market is during credit shocks or times of high credit distress. My results also point to the significance of the contagion effect in the CDS market but not in the stock market.

Η τρέχουσα χρηματοπιστωτική κρίση, έδωσε τη δυνατότητα σε μεγάλο αριθμό ερευνητών να προσπαθησουν να ερμηνεύσουν συγκεκριμένες διαδικασίες που εμφανίζονται σε αυτή την κατάσταση. Ενδιαφέρον αποτελεί η σχέση μεταξύ κρατικών ομολόγων και των CDS. Η ακόλουθη εργασία θα προσπαθήσει μέσα από θεωρητική και εμπειρική ανάλυση να μελετήσει το ασφάλιστρο κινδύνου μεταξύ των δύο μέσων με τη χρήση της θεωρητικών οικονομετρικών μεθόδων. / The current financial crisis, has enabled a large number of researchers trying to interpret specific processes that occur in it. Such interest is the relationship between government bonds and CDS. The following study will attempt to theoretical and empirical study of co-movements of the spread between the two instruments with the use of theoretical econometric methods.

Dissertação (mestrado)—Universidade de Brasília, Departamento de Economia, 2011. / Submitted by Shayane Marques Zica (marquacizh@uol.com.br) on 2011-09-12T20:34:16Z No. of bitstreams: 1 2011_RodrigoCaldasGonçalves.pdf: 805939 bytes, checksum: 362aab0bea917f3c353b5ea5c9f18b29 (MD5) / Approved for entry into archive by LUCIANA SETUBAL MARQUES DA SILVA(lucianasetubal@bce.unb.br) on 2011-09-20T15:04:47Z (GMT) No. of bitstreams: 1 2011_RodrigoCaldasGonçalves.pdf: 805939 bytes, checksum: 362aab0bea917f3c353b5ea5c9f18b29 (MD5) / Made available in DSpace on 2011-09-20T15:04:47Z (GMT). No. of bitstreams: 1 2011_RodrigoCaldasGonçalves.pdf: 805939 bytes, checksum: 362aab0bea917f3c353b5ea5c9f18b29 (MD5) / Este trabalho aborda o modelo de precificação do CDS de emissões soberanas, proposto por Remolona in ‘A Ratings Based Approach to Measuring Sovereign Risk’ (International Journal of Finance and Economics, vol. 13, issue 1, 26-39) como forma de evidenciar parcelas do risco soberano não amparadas pela perda esperada, calculada de acordo com o rating soberano dos emissores, originando o que a literatura acadêmica chama de Credit Spread Puzzle. Foi avaliado o modelo para CDS com maturidades de 2, 3, 5, 7 e 10 anos, para grupos de 7 e 8 países emergentes, incluindo-se sempre o Brasil, considerando os períodos entre janeiro de 2002 e junho de 2006, e janeiro de 2002 e junho de 2010, utilizando para tal regressões em painel. Complementarmente, foram realizadas regressões lineares individuais pelo método OLS de 12 países, sendo 10 emergentes e 2 da zona do Euro que atualmente enfrentam problemas em relação à gestão de suas dívidas externas. Foi também avaliado o comportamento do indicador de Volatilidade VIX, elaborado pela Chicago Board of Options Exchange, e as implicações que possui na formação do CDS. Com base em dados de expectativas de perdas de todos os países, calculado com base no rating individual divulgado pela agência de classificação de Risco Moody’s, e nos CDS dos diversos países analisados, foi calculada individualmente a parcela de prêmio decorrente de perdas inesperadas, ou prêmio de risco, e feita análise comparativa com o prêmio de risco brasileiro. Os resultados mostraram que o modelo proposto por Remolona sofreu forte influência da crise subprime ocorrida entre 2008 e 2009, o que mudou os parâmetros dos coeficientes da regressão em painel, sem, no entanto, invalidar o modelo. Foi constatado que existem restrições para aplicação do modelo aos CDS individualmente, não sendo confiável sua utilização sem adaptações. Foi constatada a existência de autocorrelação de resíduos, demonstrando que existem fatores que não foram incluídos na modelagem. Em relação à análise de prêmios, constatou-se que o Brasil, se comparado aos demais países avaliados, vem apresentando significativas melhoras na taxa de CDS, além de ter apresentado perdas menores em razão da crise do subprime, principalmente nas maturidades de 2, 3 e 5 anos, indicando uma incompatibilidade entre as perdas esperadas, e consequentemente a classificação de risco atribuída, e a precificação feita pelo mercado, sendo que muitas vezes a última apresentou valor inferior à precificação esperada. _______________________________________________________________________________ ABSTRACT / This paper discusses the model for pricing sovereign CDS emissions proposed by Remolona in 'A Ratings Based Approach to Measuring Sovereign Risk' (International Journal of Finance and Economics, vol. 13, issue 1, 26-39) as a way of showing portions of sovereign risk is not supported by the expected loss calculated in accordance with the sovereign rating of the issuers, resulting in what the academic literature calls the Credit Spread Puzzle. We evaluated the model for CDS with maturities of 2, 3, 5, 7 and 10 years, for groups of 7 and 8 developing countries, always including Brazil, considering the periods between January 2002 and June 2006 and January 2002 and June 2010, using such panel regressions. In addition, individual linear regressions were performed by OLS from 12 countries, 10 emerging and 2 of the Eurozone which currently face problems in relation to the management of foreign debts. It was also rated the behavior of the VIX volatility indicator, developed by the Chicago Board of Options Exchange, and the implications it has on the formation of the CDS. Based on data from expected losses of all countries, calculated on the basis of individual rating issued by rating agency Moody's, and the CDS of the analyzed countries, was calculated individually to share premium arising from unexpected losses, or premium risk, and made comparison with the Brazilian risk premium. The results showed that the model proposed by Remolona was strongly influenced by the subprime crisis that occurred between 2008 and 2009, which changed the parameters of the regression coefficients in the panel, without, however, invalidate the model. It was noted that restrictions apply to individual CDS, its use is not reliable without adaptations. It has been found the existence of autocorrelation of residues, demonstrating that there are factors that were not included in the modeling. On the analysis of premiums, it was found that Brazil, as compared to other countries evaluated, has shown significant improvements in the rate of CDS, and also presented lower losses due to subprime crisis, primarily with maturities of 2, 3 and 5 years, indicating a mismatch between the expected losses, and consequently the risk ratings assigned, and pricing by the market, and often the latter showed a value below the expected pricing.

This thesis consists of one hedge fund study and two credit default swap (CDS) studies. The first study investigates the relationship between mega hedge funds (the largest 25% of funds) and two bond yields (U.S. Treasury yield and Baa yield). Using a merged sample of 9,725 hedge funds from 1994 to 2012, I find that hedge fund outflow produced a more significant relationship than inflow, and the dollar outflow of large hedge funds can predict the increase in the bond yields. The association is also more pronounced for large funds with a short notice period prior to redemption. The results suggest that hedge fund flows provide predictive information for the movement of bond yields. The second study investigates the systematic and firm-specific credit and liquidity risks of CDS spreads. Using data on CDS spreads of 356 U.S. firms from 2002 to 2011, I find that systematic credit and liquidity risks are important in cross-sectional prediction of CDS spreads. In addition, the importance of systematic liquidity risk becomes substantial since the financial crisis in 2007. This finding challenges the current Basel III procedures for counterparty credit risk regulations, in which only pure default should be used. In addition, the systematic credit and liquidity factors can be used as a proxy for CDS spreads of firms that do not have traded CDSs. The last study extends Carr and Wu (2010), in which deep out-of-the-money (DOOM) put options and CDSs are associated as they both provide credit insurance for credit protection buyers. Using the Nelson-Siegel (1987) model, I obtain the credit and illiquidity components for DOOMs and CDSs over the period from May 2002 to May 2012. I show that, after controlling the factors that explain the difference between the DOOM and CDS markets, the components converge over time in these two markets. Thus, I can exploit the observed convergence pattern by constructing a simple trading strategy, and this benchmark strategy produces a positive return. I further construct two other strategies based on the component information, and these two refined strategies outperform the benchmark strategy by the Sharpe ratio and Carhart alpha. My three studies contribute to the literature in hedge fund systemic risk and CDS credit and liquidity risks.

The first-to-default Credit Default Swap (CDS) with multiple assets is priced when the default barrier is changing over time, which is contrast to the assumption in most of the structural-form models. The survival function of each asset follows the lognormal distribution and the interest rate is constant over time in this article. We define the joint survival function of these assets by employing the normal and Student-t copula functions to characterize the dependence among different default probability of each asset. In addition, we investigate the empirical evidences in the pricing of CDS with two or three companies by changing the values of parameters in the model. The more interesting results show that the joint default probability increases as these assets are more positive correlated. Consequently, the price of the first-to-default CDS is much higher.

Subprime residential mortgage loan securitization and its associated risks have been a major topic of discussion since the onset of the subprime mortgage crisis (SMC) in 2007. In this regard, the thesis addresses the issues of subprime residential mortgage loan (RML) securitization in discrete-, continuous-and discontinuous-time and their connections with the SMC. In this regard, the main issues to be addressed are discussed in Chapters 2, 3 and 4. In Chapter 2, we investigate the risk allocation choices of an investing bank (IB) that has to decide between risky securitized subprime RMLs and riskless Treasuries. This issue is discussed in a discrete-time framework with IB being considered to be regret- and risk-averse before and during the SMC, respectively. We conclude that if IB takes regret into account it will be exposed to higher risk when the difference between the expected returns on securitized subprime RMLs and Treasuries is small. However, there is low risk exposure when this difference is high. Furthermore, we assess how regret can influence IB's view - as a swap protection buyer - of the rate of return on credit default swaps (CDSs), as measured by the premium based on default swap spreads. We find that before the SMC, regret increases IB's willingness to pay lower premiums for CDSs when its securitized RML portfolio is considered to be safe. On the other hand, both risk- and regret-averse IBs pay the same CDS premium when their securitized RML portfolio is considered to be risky. Chapter 3 solves a stochastic optimal credit default insurance problem in continuous-time that has the cash outflow rate for satisfying depositor obligations, the investment in securitized loans and credit default insurance as controls. As far as the latter is concerned, we compute the credit default swap premium and accrued premium by considering the credit rating of the securitized mortgage loans. In Chapter 4, we consider a problem of IB investment in subprime residential mortgage-backed securities (RMBSs) and Treasuries in discontinuous-time. In order to accomplish this, we develop a Levy process-based model of jump diffusion-type for IB's investment in subprime RMBSs and Treasuries. This model incorporates subprime RMBS losses which can be associated with credit risk. Furthermore, we use variance to measure such risk, and assume that the risk is bounded by a certain constraint. We are now able to set-up a mean-variance optimization problem for IB's investment which determines the optimal proportion of funds that needs to be invested in subprime RMBSs and Treasuries subject to credit risk measured by the variance of IE's investment. In the sequel, we also consider a mean swaps-at-risk (SaR) optimization problem for IB's investment which determines the optimal portfolio which consists of subprime RMBSs and Treasuries subject to the protection by CDSs required against the possible losses. In this regard, we define SaR as indicative to IB on how much protection from swap protection seller it must have in order to cover the losses that might occur from credit events. Moreover, SaR is expressed in terms of Value-at-Risk (VaR). Finally, Chapter 5 provides an analysis of discrete-, continuous- and discontinuous-time models for subprime RML securitization discussed in the aforementioned chapters and their connections with the SMC. The work presented in this thesis is based on 7 peer-reviewed international journal articles (see [25], [44], [45], [46], [47], [48] and [55]), 4 peer-reviewed chapters in books (see [42], [50j, [51J and [52]) and 2 peer-reviewed conference proceedings papers (see [11] and [12]). Moreover, the article [49] is currently being prepared for submission to an lSI accredited journal. / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2010.

Subprime residential mortgage loan securitization and its associated risks have been a major topic of discussion since the onset of the subprime mortgage crisis (SMC) in 2007. In this regard, the thesis addresses the issues of subprime residential mortgage loan (RML) securitization in discrete-, continuous-and discontinuous-time and their connections with the SMC. In this regard, the main issues to be addressed are discussed in Chapters 2, 3 and 4. In Chapter 2, we investigate the risk allocation choices of an investing bank (IB) that has to decide between risky securitized subprime RMLs and riskless Treasuries. This issue is discussed in a discrete-time framework with IB being considered to be regret- and risk-averse before and during the SMC, respectively. We conclude that if IB takes regret into account it will be exposed to higher risk when the difference between the expected returns on securitized subprime RMLs and Treasuries is small. However, there is low risk exposure when this difference is high. Furthermore, we assess how regret can influence IB's view - as a swap protection buyer - of the rate of return on credit default swaps (CDSs), as measured by the premium based on default swap spreads. We find that before the SMC, regret increases IB's willingness to pay lower premiums for CDSs when its securitized RML portfolio is considered to be safe. On the other hand, both risk- and regret-averse IBs pay the same CDS premium when their securitized RML portfolio is considered to be risky. Chapter 3 solves a stochastic optimal credit default insurance problem in continuous-time that has the cash outflow rate for satisfying depositor obligations, the investment in securitized loans and credit default insurance as controls. As far as the latter is concerned, we compute the credit default swap premium and accrued premium by considering the credit rating of the securitized mortgage loans. In Chapter 4, we consider a problem of IB investment in subprime residential mortgage-backed securities (RMBSs) and Treasuries in discontinuous-time. In order to accomplish this, we develop a Levy process-based model of jump diffusion-type for IB's investment in subprime RMBSs and Treasuries. This model incorporates subprime RMBS losses which can be associated with credit risk. Furthermore, we use variance to measure such risk, and assume that the risk is bounded by a certain constraint. We are now able to set-up a mean-variance optimization problem for IB's investment which determines the optimal proportion of funds that needs to be invested in subprime RMBSs and Treasuries subject to credit risk measured by the variance of IE's investment. In the sequel, we also consider a mean swaps-at-risk (SaR) optimization problem for IB's investment which determines the optimal portfolio which consists of subprime RMBSs and Treasuries subject to the protection by CDSs required against the possible losses. In this regard, we define SaR as indicative to IB on how much protection from swap protection seller it must have in order to cover the losses that might occur from credit events. Moreover, SaR is expressed in terms of Value-at-Risk (VaR). Finally, Chapter 5 provides an analysis of discrete-, continuous- and discontinuous-time models for subprime RML securitization discussed in the aforementioned chapters and their connections with the SMC. The work presented in this thesis is based on 7 peer-reviewed international journal articles (see [25], [44], [45], [46], [47], [48] and [55]), 4 peer-reviewed chapters in books (see [42], [50j, [51J and [52]) and 2 peer-reviewed conference proceedings papers (see [11] and [12]). Moreover, the article [49] is currently being prepared for submission to an lSI accredited journal. / Thesis (Ph.D. (Applied Mathematics))--North-West University, Potchefstroom Campus, 2010.

Cette thèse se propose d’analyser la structure et la dynamique de dépendance de crédit des institutions financières aux Etats-Unis et en Europe durant la crise financière de 2008. Un premier chapitre présente une revue de la littérature des modèles multi-dimensionnels de crédit et des modèles économétriques de contagion financière. Ce chapitre a pour vocation de guider notre réflexion à la fois conceptuelle et méthodologique sur les hypothèses analytiques de la contagion ainsi que ses méthodes de mesure. Nous montrons que si la contagion est devenue une hypothèse centrale des modèles multivariés de risque de crédit, il n’en reste néanmoins que sa définition et sa quantification ne font pas l’objet de consensus dans la littérature. Un deuxième chapitre propose une analyse empirique des co-movements des rendements de CDS de banques et sociétés d’assurance américaines et européennes. La dissociation de leur structure de dépendance entre association linéaire et dépendances extrêmes nous permet de mettre en évidence des phénomènes d'interconnexions entre institutions financières apparues au courant de la crise et véhiculant ainsi sous l'effet de la contagion, un risque systémique croissant. Un dernier chapitre présente une interprétation économique des résultats obtenus dans notre deuxième chapitre. En particulier, nous cherchons à quantifier l'influence jouée par la contagion et les facteurs de risques communs sur la dynamique de dépendance extrême des institutions financières. Nous démontrons ainsi le rôle du risque de contrepartie, du risque de liquidité et du risque de défaut des institutions financières dans la transmission de la contagion sur le marché de CDS. / This thesis examines the credit dependence structure and dynamics of financial institutions in the U.S. and Europe amid the recent financial crisis. A first chapter presents a survey of multi-name models of credit risk and econometric models of financial contagion with the purpose of guiding both the analytical and conceptual assumptions and econometric modelling techniques we use in the subsequent chapters. We show that if contagion has become a central cornerstone of multi-name models of credit risk, there is nonetheless a lack of consensus on the way to both define and measure it. A second chapter presents the results of an empirical analysis of U.S. and European banks and insurance companies’ CDS return extreme co-movements. By uncovering financial institutions' linear as well as extremal dependence structures, we provide evidence that their credit dependence has strengthened during the crisis, thereby effectively conveying, in the face of extreme tail events, potential systemic risks. A third and last chapter provides an economic rationale of the results presented in our second chapter. In particular, we examine the impact of common risk factors and contagion on the dynamics of financial institutions' extremal credit dependence. We demonstrate the role of counterparty risk and liquidity risk, as well the repricing by market participants since July 2007 of their jump-to-default premia as additional channels driving financial institutions' increased dependence and amplifying contagion on the CDS market.