Research on credit derivatives

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For much of the past year, the 'credit crunch' has been front-page news. Large financial institutions such as Bear Sterns, Lehman Brothers, Fannie Mae, Freddy Mac, AIG, and others, have either failed or been essentialled taken over and bailed out by the US government. Central banks globally, worried about the stability of the global financial system and the potential impact on the global economy, have been forced to inject large amounts of liquidity into financial markets. The financial instruments at the heart of this crisis are complex credit derivatives such as collateralized debt obligations (or CDO's) and their relatives. It is widely agreed that the current industry approaches to valuing and hedging of CDO's have performed poorly during the credit crunch. I propose to develop better and more reliable methods for valuing and hedging CDO's, and thus, to improve our understanding of these complex financial instruments. This proposal builds on my recent progress in this area.