This thesis presents the modeling of credit risk by using structural approach. Three fundamental questions of credit risk literature are analyzed throughout the research: modeling single firm credit risk, modeling portfolio credit risk and credit risk pricing. First we analyze these questions under the assumptions that firm value follows a geometric Brownian motion and the interest rates are constant. We discuss the weaknesses of the geometric brownian motion assumption in explaining empirical properties of real data. Then we propose a new extended model in which asset value, volatility and interest rates follow affine jump diffusion processes. In our extended model volatility is stochastic, asset value and volatility has correlated jumps and interest rates are stochastic and have jumps. Finally, we analyze the modeling of single firm credit risk and credit risk pricing by using our extended model and show how our model can be used as a solution for the problems we encounter with simple models.

Venture capital (VC) has been accepted to play an important role in encouraging of entrepreneurship, maintaining technological improvement and, urban and regional development in the country besides providing financial support for small and medium size enterprises (SMEs) with high growth potential. This thesis analyzes the reasons of the limited venture capital investments in Turkey and the measures that should be taken in order to increase both the effectiveness of VC in maintaining urban and regional development and VC investments to SMEs. Furthermore, VC is emphasized to be an important model that can be efficient in solving the financing, management and technical problems of SMEs with high growth potential. In order to analyze the problems, a field research was conducted. Research consists of two parts. In the first part, the questionnaire was conducted with 100 SMEs in Ankara that are active in OSTIM so as to reveal the general characteristics of SMEs and the funds they use to solve their financial problems in start-up and expansion stages. SMEs are generally family run firms that have limited capital and whose owner is also the manager in the firm. Equity capital is the most important source that is used in the start-up and expansion stages by the firms. The rate of usage of subsidies like investment and export incentives and technology development support, credit guarantee fund and venture capital by these firms is low. Lack of knowledge, insufficiency of qualified staff and bureaucratic barriers are the most significant reasons of this situation. In the second part, interviews with venture capitalists or managers of 3 important VC firms that are active in Turkey come up. These interviews aimed to reveal the goal of VC firms, evaluation process of the applications and VC firms&rsquo / expectations from SMEs. VC firms face difficulties with the projects with no growth potential. Moreover, applicant firms do not have adequate staff and supplies in order to prepare the financial information for the application process, and this happens to be a crucial problem. According to the results of the field research, some suggestions are tried to be put forward in terms of the achievement of a more effective use of VC system in Turkey. In this regard, firstly, efficiency of subsidies-particularly institutions that provide R&amp / D supports- should be increased. Secondly, Credit Guarantee Fund should be strengthened in order to provide more entrepreneurs with guarantee support. And finally, establishment of a center that is to provide consultancy for applicant firms in their project development and application periods is suggested.

A Constant Proportion Debt Obligation is a credit derivative which has been introduced to generate a surplus return over a riskless market return. The surplus payments should be obtained by synthetically investing in a risky asset (such as a credit index) and using a linear leverage strategy which is capped for bounding the risk. In this thesis, we investigate two approaches for investigation of constant proportion debt obligations. First, we search for an optimal leverage strategy which minimises the mean-square distance between the final payment and the final wealth of constant proportion debt obligation by the use of optimal control methods. We show that the optimal leverage function for constant proportion debt obligations in a mean-square sense coincides with the one used in practice for geometric type diffusion processes. However, the optimal strategy will lead to a shortfall for some cases. The second approach of this thesis is to develop a pricing formula for constant proportion debt obligations. To do so, we consider both the early defaults and the default on the final payoff features of constant proportion debt obligations. We observe that a constant proportion debt obligation can be modelled as a barrier option with rebate. In this respect, given the knowledge on barrier options, the pricing equation is derived for a particular leverage strategy.

The credit scoring with the help of classification techniques provides to take easy and quick decisions in lending. However, no definite consensus has been reached with regard to the best method for credit scoring and in what conditions the methods performs best. Although a huge range of classification techniques has been used in this area, the logistic regression has been seen an important tool and used very widely in studies. This study aims to examine accuracy and bias properties in parameter estimation of the logistic regression by using Monte Carlo simulations in four aspect which are dimension of the sets, length, the included percentage defaults in data and effect of variables on estimation. Moreover, application of some important statistical and non-statistical methods on Turkish credit default data is provided and the method accuracies are compared for Turkish market. Finally, ratings on the results of best method is done by using receiver operating characteristic curve.

Credit risk measurement and management has great importance in credit market. Credit derivative products are the major hedging instruments in this market and credit default swap contracts (CDSs) are the most common type of these instruments. As observed in credit crunch (credit crisis) that has started from the United States and expanded all over the world, especially crisis of Iceland, CDS premiums (prices) are better indicative of credit risk than credit ratings. Therefore, CDSs are important indicators for credit risk of an obligor and thus these products should be understood by market participants well enough. In this thesis, initially, advanced credit risk models firsts, the structural (firm value) models, Merton Model and Black-Cox constant barrier model, and the intensity-based (reduced-form) models, Jarrow-Turnbull and Cox models, are studied. For each credit risk model studied, survival probabilities are calculated. After explaining the basic structure of a single name CDS contract, by the help of the general pricing formula of CDS that result from the equality of in and out cash flows of these contracts, CDS price for each structural models (Merton model and Black-Cox constant barrier model) and CDS price for general type of intensity based models are obtained. Before the conclusion, default intensities are obtained from the distribution functions of default under two basic structural models / Merton and Black-Cox constant barrier. Finally, we conclude our work with some inferences and proposals.

In this thesis, the structural model in credit risk and the credit derivatives is studied under both Black-Scholes setting and Variance Gamma (VG) setting. Using a Variance Gamma process, the distribution of the firm value process becomes asymmetric and leptokurtic. Also, the jump structure of VG processes allows random default times of the reference entities. Among structural models, the most emphasis is made on the Black-Cox model by building a relation between the survival probabilities of the Black-Cox model and the value of a binary down and out barrier option. The survival probabilities under VG setting are calculated via a Partial Integro Differential Equation (PIDE). Some applications of binary down and out barrier options, default probabilities and Credit Default Swap par spreads are also illustrated in this study.