Credit Derivatives Pricing Models: Model, Pricing and Implementation

Rating:
Summary: Very Detailed
Review: A very useful text for those who need to understand how to implement a model. In finance, notation and concepts vary widely across different authors and it is often uncertain what the equations behind the model mean. It is helpful to be able to walk through Schonbucher's detailed explanations of assumptions and key ideas within each alternative model choice. His writing in this book is clearer than his earlier papers.

Rating:
Summary: Models in theory
Review: 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:
Summary: Useful but very sloppily written
Review: Schonbucher's book is a moderately useful introduction to the quantitative techniques used in credit derivatives modeling. It describes in some detail the standard approaches to credit modeling, and provides a valuable list of references to the original literature. I have two serious issues with the book. The first one is its mode of presentation. The author seems to insist on the traditional "definition - theorem - proof" framework characteristic of mathematics writing, without adhering to the discipline required by this approach. As a result, it is often unclear what is being assumed, what is being claimed, and whether anything is being proved. The second problem is the author's total disregard for the numerical aspects of financial modeling: very few algorithms are presented, and no implementation issues are discussed (other than some casual references to the functionalities of Excel).

Rating:
Summary: Informative, Rigorous, Excellent
Review: 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:
Summary: Amongst the best of a bad lot
Review: The state of theory is in such tremendous flux at present with a majority of research unpublished and a growing consensus that the state of the art is entirely inadequate. No book could possibly please industry researchers at this point, but Philipp contributes some ideas and clarification here and there and some leads which are valuable. He is perhaps a little dismissive and pessimistic when the theory wanders into hard mathematical problems, and to to a large extent his book ends where the fun stuff begins. Nontheless I would recommend, especially to those entering the field.

Rating:
Summary: Academic's Imperfect Idea of the Market
Review: This book on credit derivatives models is written by an academic without a feel for how the market trades in practice. Schonbucher presents the mathematical equations without expanding on the meaning of the models or their application.

There are some errors of fact when he discusses how certain products work, such as first-to-default baskets, a serious error in and of itself, but unfortunately there are additional similar errors which show the author has an imperfect understanding of the market he writes about. All in all this book was an unsatisfying treatment of the topic.

Rating:
Summary: Good Model Overview
Review: 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".