[Quantlib-dev] credit modeling, Issuer, etc.

[Chris K. <chr...@ya...>]

Dear All,

I'd like to start a bit of a discussion about credit modeling in QL given that it is starting to appear and that the credit crisis has done some very effective stress-testing of assumptions.  So I'll divide this into high-level and technical sections.

High-Level

Term structures are one of the fundamental things in QL, but I'm not sure that QL has the right ones for credit.  In the market I can trade a CDS and find quotes on Bloomberg.  However, I cannot directly trade a recovery rate (except OTC via digital default swaps, or recovery swaps as they are sometimes know).  Since the tradelable numbers should, IMNSHO, be fundamental QL needs:
    CdsTermStructure
and (maybe)
    RecoveryRateTermStructure
Only then can we get on with defining default probability term structures.  Yes, you can argue that the CDS quotes themselves provide the term structure (if you add recoveries ...) ... but that is not the same as packaging this info up in a useful way.
    Also, if you want an instrument-based probability of default term structure then you should give it recovery swaps as well as CDSs - giving it a recovery rate doesn't specify what observable it came from (assumptions anyone?).

Technical

The class Issuer currently holds a default probability term structure and a recovery rate.  However, if you look on Markit (or one of its competitors) then you see that a legal entity can have up to about 10 different CDS spread curves quoted - these come from different currencies, seniorities, and restructuring/default clauses.

I suggest that the Issuer class should be polymorphic (i.e. lots of virtual's) and that it also inherit from Observer/Observable for ease of use with the rest of QL.  Then users can add as much complexity as they want for different situations.

Well, that's my contribution to starting the dicussion ... all replies encouraged!

Best regards,
Chris