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Discrete tenor models for credit risky portfolios driven by time-inhomogeneous L\'evy processes

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  • Ernst Eberlein
  • Zorana Grbac
  • Thorsten Schmidt
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    Abstract

    The 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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    File URL: http://arxiv.org/pdf/1006.2012
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1006.2012.

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    Date of creation: Jun 2010
    Date of revision: Apr 2013
    Handle: RePEc:arx:papers:1006.2012

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    Web page: http://arxiv.org/

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    1. 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.
    2. Duffie, Darrell & Singleton, Kenneth J, 1999. "Modeling Term Structures of Defaultable Bonds," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 687-720.
    3. 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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