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Author: Fan Yu Publisher: ISBN: Category : Languages : en Pages : 24
Book Description
This paper presents an intensity-based model of correlated defaults with application to the valuation of defaultable securities. The model assumes that the intensities of the default times are driven by common factors as well as other defaults in the system. A recursive procedure called the total hazard construction is used to generate default times with a broad class of correlation structures. This approach is compared to standard reduced-form models based on conditional independence as well as alternative approaches involving copula functions. Examples are given for the pricing of defaultable bonds and credit default swaps of the regular and basket type.
Author: Fan Yu Publisher: ISBN: Category : Languages : en Pages : 24
Book Description
This paper presents an intensity-based model of correlated defaults with application to the valuation of defaultable securities. The model assumes that the intensities of the default times are driven by common factors as well as other defaults in the system. A recursive procedure called the total hazard construction is used to generate default times with a broad class of correlation structures. This approach is compared to standard reduced-form models based on conditional independence as well as alternative approaches involving copula functions. Examples are given for the pricing of defaultable bonds and credit default swaps of the regular and basket type.
Author: Fan Yu Publisher: ISBN: Category : Languages : en Pages : 17
Book Description
Reduced-form models have proven to be a useful tool for analyzing the dynamics of credit spreads. However, some have recently questioned their ability to match the level of empirical default correlation. The key concern appears to be the assumption that defaults are independent conditional on the state variables driving the default intensity. In this paper, I use a quot;thought experimentquot; as well as numerical examples calibrated to recent studies to show that the model-implied default correlation can be quite sensitive to the common factor structure imposed on the default intensity. Therefore, the quot;inabilityquot; of reduced-form models to generate sufficient default correlation has more to do with a restrictive common factor structure than the assumption of conditional independence.
Author: Dale W. R. Rosenthal Publisher: ISBN: Category : Languages : en Pages : 30
Book Description
In the recent financial crisis, improperly modeled default correlations caused multi-billion-dollar losses. We propose parsimonious statistical approximations for correlated defaults which follow from an intensity-based risk-factor model and allow consistent parameter estimation, even if another default model is used. The parameters imply an approximating portfolio of independent, identical-credit loans and jointly characterize the default-relative diversification and average credit quality. The approach improves upon similar methods by allowing for fatter tails as well as loans differing in size and credit quality. Some guidance is also given on structuring CDOs to have credit-ratings that are robust to crises. An example shows how to estimate the approximating portfolio.
Author: Raquel M. Gaspar Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
There has been increasing support in the empirical literature that both the probability of default (PD) and the loss given default (LGD) are correlated and driven by macroeconomic variables. Paradoxically, there has been very little effort from the theoretical literature to develop credit risk models that would include this possibility.The goals of this paper are: first, to develop the theoretical reduced-form framework needed to handle stochastic correlation of recovery and intensity, proposing a new class of models; second, to understand under what conditions would our class of models reflect empirically observed features and, finally, to use concrete model from our class to study the impact of this correlation in credit risk term structures.We show that, in our class of models, it is possible to model directly empirically observed features. For instance, we can define default intensity and losses given default to be higher during economic depression periods - the well-know credit risk business cycle effect. Using the concrete model we show that in reduced-form models different assumptions - concerning default intensities, distribution of losses given default, and specifically their correlation - have a significant impact on the shape of credit spread term structures, and consequently on pricing of credit products as well as credit risk assessment in general.Finally, we propose a way to calibrate this class of models to market data, and illustrate the technique using our concrete example using US market data on corporate yields.
Author: Philipp Schönbucher Publisher: ISBN: Category : Languages : en Pages : 30
Book Description
In this paper we present a new approach to incorporate dynamic default dependency in intensity-based default risk models. The model uses an arbitrary default dependency structure which is specified by the Copula of the times of default, this is combined with individual intensity-based models for the defaults of the obligors without loss of the calibration of the individual default-intensity models. The dynamics of the survival probabilities and credit spreads of individual obligors are derived and it is shown that in situations with positive dependence, the default of one obligor causes the credit spreads of the other obligors to jump upwards, as it is experienced empirically in situations with credit contagion. For the Clayton copula these jumps are proportional to the pre-default intensity. If information about other obligors is excluded, the model reduces to a standard intensity model for a single obligor, thus greatly facilitating its calibration. To illustrate the results they are also presented for Archimedean copulae in general, and Gumbel and Clayton copulae in particular. Furthermore it is shown how the default correlation can be calibrated to a Gaussian dependency structure of CreditMetrics-type.
Author: Kay Giesecke Publisher: ISBN: Category : Languages : en Pages : 30
Book Description
A thorough understanding of the joint default behavior of credit-risky securities is essential for credit risk measurement as well as the valuation of multi-name credit derivatives and Collateralized Debt Obligations. In this paper we study a simple and tractable intensity-based model for correlated defaults, in which unpredictable default arrival times are jointly exponentially distributed. Since all relevant results are given in closed-form, the model can be easily implemented. The efficient simulation of dependent default times for pricing and risk management purposes is straightforward as well. Parameter calibration relies on market data as well as data and figures provided by rating agencies and credit risk management solutions.
Author: Gunter Meissner Publisher: John Wiley & Sons ISBN: 1118796896 Category : Business & Economics Languages : en Pages : 268
Book Description
A thorough guide to correlation risk and its growing importance in global financial markets Ideal for anyone studying for CFA, PRMIA, CAIA, or other certifications, Correlation Risk Modeling and Management is the first rigorous guide to the topic of correlation risk. A relatively overlooked type of risk until it caused major unexpected losses during the financial crisis of 2007 through 2009, correlation risk has become a major focus of the risk management departments in major financial institutions, particularly since Basel III specifically addressed correlation risk with new regulations. This offers a rigorous explanation of the topic, revealing new and updated approaches to modelling and risk managing correlation risk. Offers comprehensive coverage of a topic of increasing importance in the financial world Includes the Basel III correlation framework Features interactive models in Excel/VBA, an accompanying website with further materials, and problems and questions at the end of each chapter
Author: Fan Yu
Author: Fan Yu
Author: Ismail Onur Filiz
Author: Kasper Mundbjerg Eriksen
Author: Fan Yu
Author: Dale W. R. Rosenthal
Author: 
Author: Raquel M. Gaspar
Author: Philipp Schönbucher
Author: Kay Giesecke
Author: Gunter Meissner