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Default correlation, cluster dynamics and single names: The GPCL dynamical loss model

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Author Info

  • Damiano Brigo
  • Andrea Pallavicini
  • Roberto Torresetti

Abstract

We extend the common Poisson shock framework reviewed for example in Lindskog and McNeil (2003) to a formulation avoiding repeated defaults, thus obtaining a model that can account consistently for single name default dynamics, cluster default dynamics and default counting process. This approach allows one to introduce significant dynamics, improving on the standard "bottom-up" approaches, and to achieve true consistency with single names, improving on most "top-down" loss models. Furthermore, the resulting GPCL model has important links with the previous GPL dynamical loss model in Brigo, Pallavicini and Torresetti (2006a,b), which we point out. Model extensions allowing for more articulated spread and recovery dynamics are hinted at. Calibration to both DJi-TRAXX and CDX index and tranche data across attachments and maturities shows that the GPCL model has the same calibration power as the GPL model while allowing for consistency with single names

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File URL: http://arxiv.org/pdf/0812.4163
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 0812.4163.

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Date of creation: Dec 2008
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Publication status: Published in Short version in "International Journal of Theoretical and Applied Finance", Vol 10, n. 4, and in "Credit Correlation - Life After Copulas", World Scientific, 2007
Handle: RePEc:arx:papers:0812.4163

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Cited by:
  1. Balakrishna, B S, 2010. "Levy Subordinator Model: A Two Parameter Model of Default Dependency," MPRA Paper 26274, University Library of Munich, Germany.
  2. Balakrishna, B S, 2008. "Levy Density Based Intensity Modeling of the Correlation Smile," MPRA Paper 14922, University Library of Munich, Germany, revised 06 Apr 2009.
  3. Balakrishna, B S, 2010. "Levy Subordinator Model of Default Dependency," MPRA Paper 21386, University Library of Munich, Germany.

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