Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes
AbstractThe goal of this paper is to specify dynamic term structure models with discrete tenor structure for credit portfolios in a top-down setting driven by time-inhomogeneous L\'evy processes. We provide a new framework, conditions for absence of arbitrage, explicit examples, an affine setup which includes contagion and pricing formulas for STCDOs and options on STCDOs. A calibration to iTraxx data with an extended Kalman filter shows an excellent fit over the full observation period. The calibration is done on a set of CDO tranche spreads ranging across six tranches and three maturities.
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Bibliographic InfoPaper provided by arXiv.org in its series Papers with number 1006.2012.
Date of creation: Jun 2010
Date of revision: Apr 2013
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- Philippe Ehlers & Philipp Schönbucher, 2009.
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Finance and Stochastics,
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- Philippe Ehlers & Philipp J. Schoenbucher, 2006. "Background Filtrations andCanonical Loss Processes for Top-Down Models of Portfolio Credit Risk," Swiss Finance Institute Research Paper Series 07-07, Swiss Finance Institute.
- Jakob Sidenius & Vladimir Piterbarg & Leif Andersen, 2008. "A New Framework For Dynamic Credit Portfolio Loss Modelling," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 11(02), pages 163-197.
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