Credit Derivatives Pricing Models: Model, Pricing and Implementation
Author: Philipp J. Schönbucher, P.J. Schonbucher
List Price: $89.95
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ISBN: 0470842911
Publisher: John Wiley & Sons (01 March, 2003)
Sales Rank: 12,130
Average Customer Rating: 3.75 out of 5
Customer Reviews
Rating: 2 out of 5
Models in theory
Nice equations, but hasn't kept up with Ph.D.'s who work on Wall Street and know the theory, thoroughly understand the products, and can apply practical but theoretically sound compromises to accommodate reality. Ph.D.'s at work in finance - including myself (physics) - are probably too busy to write the definitive modelling book. This book fails to address key ingredients such as daycounts, settlement conventions, documentation asymmetry, and more.
Rating: 5 out of 5
Informative, Rigorous, Excellent
The book covers the basics of credit risk modeling and derivative pricing (both structural and intensity type of models), explained in a clear style with enough detail to enable implementation (a rarity in financial literature!). Basics of the theory of stochastic processes and risk-neutral pricing are also covered. Calibration methods for the models are clearly explained. Due to the limited scope, some topics are given only cursory coverage (Copula function methods, role of interest-rates models etc.), but even then, enough references are provided. A very useful, concisely written tome!
Rating: 4 out of 5
Good Model Overview
This is a fine overview of credit derivatives modeling. The model explanations are good, but the book may have benefited from more disclosure about data limitations and the current sources of data. Value dislocations due to documentation language are not captured by the models, especially in the light of ISDA's 2003 language changes. More detail on applications and the need to deal with risks introduced by specific structures would also have been helpful.Curiously, there are a few conventions inconsistent with market practice used in this book. For instance, the author defines credit risk as default risk, ignoring the standard definition of credit risk which includes general credit spread widening, and credit downgrades. It also seems the author is unfamiliar with how first-to-default baskets are traded, and seems to think that premiums of the survivors are paid after a first-to-default event (They cease.). These observations aside, this is a long-awaited reference for credit derivatives professionals.
For the above risks, I recommend two other sources. Applications and documentation risks are clearly explained in Tavakoli's "Credit Derivatives" (2nd Edition). For professionals who want to know how to apply derivatives in structured finance, I highly recommend Tavakoli's just released book: "Collateralized Debt Obligations and Structured Finance".
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