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Credit Derivatives and Risk AversionTim LeungColumbia University Ronnie SircarPrinceton University - Department of Operations Research and Financial Engineering Thaleia ZariphopoulouUniversity of Texas at Austin - Red McCombs School of Business December 1, 2007 Advances in Econometrics Year: 2008, Vol. 22, pp. 275 - 291, 2008 Abstract: 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 investor risk aversion.
Number of Pages in PDF File: 15 Keywords: credit risk, utility maximization, defaultable bonds, indifference price JEL Classification: M41, M44, J33, G13 Accepted Paper SeriesDate posted: July 4, 2009Suggested CitationContact Information
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