Chapter 14

Credit Calibration with Structural Models and Equity Return Swap Valuation under Counterparty Risk

Damiano Brigo

Gilbart Professor of Financial Mathematics, King's College, London

Massimo Morini

Bocconi University and Banca IMI

Marco Tarenghi

Mediobanca

In this chapter we develop structural first passage models—analytically tractable first passage (AT1P) and scenario barrier time-varying volatility (SBTV)—with time-varying volatility and characterized by high tractability, moving from the original work of Brigo and Tarenghi (2004, 2005) and Brigo and Morini (2006). The models can be calibrated exactly to credit spreads using efficient closed-form formulas for default probabilities. In these models default events are caused by the ...

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