Price Calibration of basket default swap: Evidence from Japanese market

The aim of this paper is the price calibration of basket default swap from Japanese market data. The value of this instruments depend on the number of factors including credit rating of the obligors in the basket, recovery rates, intensity of default, basket size and the correlation of obligors in the basket. A fundamental part of the pricing framework is the estimation of the instantaneous default probabilities for each obligor. Because default probabilities depend on the credit quality of the considered obligor, well-calibrated credit curves are a main ingredient for constructing default times. The calibration of credit curves take into account internal information on credit migrations and default history. We refer to Japan Credit Rating Agency to obtain rating transition matrix and cumulative default rates. Default risk is often considered as a rare-event and then, many studies have shown that many distributions have fatter tails than those captured by the normal distribution. Subsequently, the choice of copula and the choice of procedures for rare-event simulation govern the pricing of basket credit derivatives. Joshi and Kainth (2004) introduced an Importance Sampling technique for rare-event that forces a predetermined number of defaults to occur on each path. We consider using Gaussian copula and t-student copula and study their impact on basket credit derivative prices. We will present an application of the Canonical Maximum Likelihood Method (CML) for calibrating t-student copula to Japanese market data.Basket Default Swaps, Credit Curve, Monte Carlo method, Gaussian copula, t-student copula, Japanese market data, CML, Importance Sampling

THE APPLICATION OF COPULAS IN PRICING DEPENDENT CREDIT DERIVATIVES INSTRUMENTS

The aim of this paper is to use copulas functions to capture the different structures of dependency when we deal with portfolios of dependent credit risks and a basket of credit derivatives. We first present the wellknown result for the pricing of default risk, when there is only one defaultable firm. After that, we expose the structure of dependency with copulas in pricing dependent credit derivatives. Many studies suggest the inadequacy of multinormal distribution and then the failure of methods based on linear correlation for measuring the structure of dependency. Finally, we use Monte Carlo simulations for pricing Collateralized debt obligation (CDO) with Gaussian an Student copulas.default risk, credit derivatives, CDO, copulas functions, Monte Carlo simulations.

Copula based simulation procedures for pricing basket Credit Derivatives

This paper deals with the impact of structure of dependency and the choice of procedures for rare-event simulation on the pricing of multi-name credit derivatives such as nth to default swap and Collateralized Debt Obligations (CDO). The correlation between names defaulting has an effect on the value of the basket credit derivatives. We present a copula based simulation procedure for pricing basket default swaps and CDO under different structure of dependency and assessing the influence of different price drivers (correlation, hazard rates and recovery rates) on modelling portfolio losses. Gaussian copulas and Monte Carlo simulation is widely used to measure the default risk in basket credit derivatives. Default risk is often considered as a rare-event and then, many studies have shown that many distributions have fatter tails than those captured by the normal distribution. Subsequently, the choice of copula and the choice of procedures for rare-event simulation govern the pricing of basket credit derivatives. An alternative to the Gaussian copula is Clayton copula and t-student copula under importance sampling procedures for simulation which captures the dependence structure between the underlying variables at extreme values and certain values of the input random variables in a simulation have more impact on the parameter being estimated than others .Collateralized Debt Obligations, Basket Default Swaps, Monte Carlo method, One factor Gaussian copula, Clayton copula, t-student copula, importance sampling

Does the recent financial crisis affect credit default swap markets?

the aim of this paper is to explain the effect of "Subrime" crisis on credit default swap markets. After the problems of CDO's insttruments, protection buyers use classical credit derivatives instruments such CDS contracts.Subrime crisis, CDO, CDS

Design study of a magnetoelectric-electromagnetic vibration energy converter for energy harvesting

The aim of this paper is to design a combination of a magnetoelectric-electromagnetic (ME-EM) vibration converter in order to reach an improved energy outcome. In this paper, the influence of magnets polarization and magnetoelectric transducer and coil direction are investigated. For this purpose, a finite element model is developed using one coil, one ME transducer in a magnetic circuit. Simulation results show that a better magnetic field distribution and variation is reached, if the magnetic circuit magnets are placed in attraction. Radial polarization shows decisive advantages in comparison with axial polarization. The placement of coil parallel to the magnetic circuit direction and the magnetization of the ME transducer along its width is the optimal direction relative to the magnetic circuit

La récente crise financière internationale cause t-elle la crise des marchés des swaps sur défaut de crédit?

the aim of this paper is to explain the effect of "Subrime" crisis on credit default swap markets. After the problems of CDO's insttruments, protection buyers use classical credit derivatives instruments such CDS contracts

Price Calibration of basket default swap: Evidence from Japanese market

The aim of this paper is the price calibration of basket default swap from Japanese market data. The value of this instruments depend on the number of factors including credit rating of the obligors in the basket, recovery rates, intensity of default, basket size and the correlation of obligors in the basket. A fundamental part of the pricing framework is the estimation of the instantaneous default probabilities for each obligor. Because default probabilities depend on the credit quality of the considered obligor, well-calibrated credit curves are a main ingredient for constructing default times. The calibration of credit curves take into account internal information on credit migrations and default history. We refer to Japan Credit Rating Agency to obtain rating transition matrix and cumulative default rates. Default risk is often considered as a rare-event and then, many studies have shown that many distributions have fatter tails than those captured by the normal distribution. Subsequently, the choice of copula and the choice of procedures for rare-event simulation govern the pricing of basket credit derivatives. Joshi and Kainth (2004) introduced an Importance Sampling technique for rare-event that forces a predetermined number of defaults to occur on each path. We consider using Gaussian copula and t-student copula and study their impact on basket credit derivative prices. We will present an application of the Canonical Maximum Likelihood Method (CML) for calibrating t-student copula to Japanese market data

Price Calibration of basket default swap: Evidence from Japanese market

The aim of this paper is the price calibration of basket default swap from Japanese market data. The value of this instruments depend on the number of factors including credit rating of the obligors in the basket, recovery rates, intensity of default, basket size and the correlation of obligors in the basket. A fundamental part of the pricing framework is the estimation of the instantaneous default probabilities for each obligor. Because default probabilities depend on the credit quality of the considered obligor, well-calibrated credit curves are a main ingredient for constructing default times. The calibration of credit curves take into account internal information on credit migrations and default history. We refer to Japan Credit Rating Agency to obtain rating transition matrix and cumulative default rates. Default risk is often considered as a rare-event and then, many studies have shown that many distributions have fatter tails than those captured by the normal distribution. Subsequently, the choice of copula and the choice of procedures for rare-event simulation govern the pricing of basket credit derivatives. Joshi and Kainth (2004) introduced an Importance Sampling technique for rare-event that forces a predetermined number of defaults to occur on each path. We consider using Gaussian copula and t-student copula and study their impact on basket credit derivative prices. We will present an application of the Canonical Maximum Likelihood Method (CML) for calibrating t-student copula to Japanese market data

Copula based simulation procedures for pricing basket Credit Derivatives

This paper deals with the impact of structure of dependency and the choice of procedures for rare-event simulation on the pricing of multi-name credit derivatives such as nth to default swap and Collateralized Debt Obligations (CDO). The correlation between names defaulting has an effect on the value of the basket credit derivatives. We present a copula based simulation procedure for pricing basket default swaps and CDO under different structure of dependency and assessing the influence of different price drivers (correlation, hazard rates and recovery rates) on modelling portfolio losses. Gaussian copulas and Monte Carlo simulation is widely used to measure the default risk in basket credit derivatives. Default risk is often considered as a rare-event and then, many studies have shown that many distributions have fatter tails than those captured by the normal distribution. Subsequently, the choice of copula and the choice of procedures for rare-event simulation govern the pricing of basket credit derivatives. An alternative to the Gaussian copula is Clayton copula and t-student copula under importance sampling procedures for simulation which captures the dependence structure between the underlying variables at extreme values and certain values of the input random variables in a simulation have more impact on the parameter being estimated than others