Book Review of Credit Risk: Pricing, Measurement, and Management

Abstract

Credit risk is the major challenge for risk managers and market regulators. Banks, regulators and central banks do not agree on how to measure credit risk and, more particularly, on how to compute the optimal capital that is necessary for protecting the different partners that share this risk. Asking banks to keep too much capital in reserve to cover credit risk can be a source of market distortion in risk management behavior. All these issues arise in part because credit risk is not well understood. So the contribution of Duffie and Singleton will be welcomed by the academics, regulators, and practitioners who consult it. The book has thirteen chapters, three appendices (two on affine processes), a comprehensive list of references, and an index (authors and subjects). It covers all subjects related to credit risk. The main focus is modeling credit risk: measuring portfolio credit risk and pricing different securities exposed to credit risk. The focus on credit risk management is less important. The book covers with great clarity the relevant topics of credit risk. It reflects the strong academic competence of the authors. This is certainly the best reference on credit risk available on the market. I recommend the book to academics and professionals, and also for the teaching of credit risk at Masters and PhD levels in finance and economics.

Keywords: Credit risk, pricing, measurement, management

JEL Classification: D80, G12, G13