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Pricing And Hedging Of Portfolio Credit Derivatives With Interacting Default Intensities

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Author Info
RÜDIGER FREY () (Department of Mathematics, University of Leipzig, 04009 Leipzig, Germany)
JOCHEN BACKHAUS () (Department of Mathematics, University of Leipzig, 04009 Leipzig, Germany)
Abstract

We consider reduced-form models for portfolio credit risk with interacting default intensities. In this class of models default intensities are modeled as functions of time and of the default state of the entire portfolio, so that phenomena such as default contagion or counterparty risk can be modeled explicitly. In the present paper this class of models is analyzed by Markov process techniques. We study in detail the pricing and the hedging of portfolio-related credit derivatives such as basket default swaps and collaterized debt obligations (CDOs) and discuss the calibration to market data.

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Publisher Info
Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal International Journal of Theoretical and Applied Finance.

Volume (Year): 11 (2008)
Issue (Month): 06 ()
Pages: 611-634
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Handle: RePEc:wsi:ijtafx:v:11:y:2008:i:06:p:611-634

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Related research
Keywords: Credit derivatives; CDOs; hedging; Markov chains;

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  1. Emilio Barucci & Marco Tolotti, 2009. "The dynamics of social interaction with agents’ heterogeneity," Working Papers 189, Department of Applied Mathematics, University of Venice. [Downloadable!]
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