Optimal Control of Credit Risk presents an alternative methodology to
deal with a financial problem that has not been well analyzed yet: the
control of credit risk. Credit risk has become recently the center of
interest of the financial community, with new instruments (such as
Credit Risk Derivatives) and new methodologies (such as Credit Metrics)
being developed. The recent literature has focused on the pricing of
credit risk. On the other hand, practitioners tend to eliminate credit
risk rather than price it. They do so via collateralization. The authors
propose here a methodological basis for an optimal collateralization.
The monograph is organized as follows: Chapter 1 reviews the main
avenues of literature related to our problem; Chapter 2 provides a brief
overview of the main optimal control principles; and Chapter 3 presents
the models and their setting.
In the remaining chapters, the authors propose two sets of programs. One
set of programs will apply in cases where the information on the
assets=value is readily available (full observation case), while the
other applies when costly audits are needed in order to assess this
value (partial observation case).
In either case, the modeling stage leads to a set of quasi-variational
inequalities which the authors attempt to solve numerically in the
simpler case of full observations. This is done in Chapter 6. Finally a
simulation analysis is carried out in Chapter 7, in which the authors
study the influence on the control process of changes in the different
model parameters. This precedes a discussion on possible extensions in
Chapter 8 and some concluding remarks in Section 9.
