554 research outputs found
On Pricing Basket Credit Default Swaps
In this paper we propose a simple and efficient method to compute the ordered
default time distributions in both the homogeneous case and the two-group
heterogeneous case under the interacting intensity default contagion model. We
give the analytical expressions for the ordered default time distributions with
recursive formulas for the coefficients, which makes the calculation fast and
efficient in finding rates of basket CDSs. In the homogeneous case, we explore
the ordered default time in limiting case and further include the exponential
decay and the multistate stochastic intensity process. The numerical study
indicates that, in the valuation of the swap rates and their sensitivities with
respect to underlying parameters, our proposed model outperforms the Monte
Carlo method
On infectious models for dependent default risk
Modeling dependent defaults is a key issue in risk measurement and management. In this paper, we introduce a Markovian infectious model to describe the dependent relationship of default processes of credit entities. The key idea of the proposed model is based on the concept of common shocks adopted in the insurance industry. We compare the proposed model to both one-sector and two-sector models considered in the credit literature using real default data. A log-likelihood ratio test is applied to compare the goodness-of- fit of the proposed model. Our empirical results reveal that the proposed model outperforms both the one-sector and two-sector models. © 2011 IEEE.published_or_final_versionThe 4th International Joint Conference on Computational Sciences and Optimization (CSO 2011), Yunnan, China, 15-19 April 2011. In Proceedings of the 4th CSO, 2011, p. 1196-120
A default system with overspilling contagion
In classical contagion models, default systems are Markovian conditionally on
the observation of their stochastic environment, with interacting intensities.
This necessitates that the environment evolves autonomously and is not
influenced by the history of the default events. We extend the classical
literature and allow a default system to have a contagious impact on its
environment. In our framework, contagion can either be contained within the
default system (i.e., direct contagion from a counterparty to another) or spill
from the default system over its environment (indirect contagion). This type of
model is of interest whenever one wants to capture within a model possible
impacts of the defaults of a class of debtors on the more global economy and
vice versa
Effects of Economic Interactions on Credit Risk
We study a credit risk model which captures effects of economic interactions
on a firm's default probability. Economic interactions are represented as a
functionally defined graph, and the existence of both cooperative, and
competitive, business relations is taken into account. We provide an analytic
solution of the model in a limit where the number of business relations of each
company is large, but the overall fraction of the economy with which a given
company interacts may be small. While the effects of economic interactions are
relatively weak in typical (most probable) scenarios, they are pronounced in
situations of economic stress, and thus lead to a substantial fattening of the
tails of loss distributions in large loan portfolios. This manifests itself in
a pronounced enhancement of the Value at Risk computed for interacting
economies in comparison with their non-interacting counterparts.Comment: 24 pages, 6 figure
On Correlation Effects and Default Clustering in Credit Models
We establish Markovian models in the Heath, Jarrow and Morton paradigm where the credit spreads curves of multiple firms and the term structure of interest rates can be represented analytically at any point in time in terms of a finite number of state variables. The models make no restrictions on the correlation structure between interest rates and credit spreads. In addition to diffusive and jump-induced default correlations, default events can impact credit spreads of surviving firms. This feature allows a greater clustering of defaults. Numerical implementations highlight the importance of taking interest rate-credit spread correlations, credit-spread impact factors and the full credit spread curve information into account when building a unified model framework that prices any credit derivative.
- …