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A la Carte of Correlation Models: Which One to Choose?

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  • Harry Zheng
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    Abstract

    In this paper we propose a copula contagion mixture model for correlated default times. The model includes the well known factor, copula, and contagion models as its special cases. The key advantage of such a model is that we can study the interaction of different models and their pricing impact. Specifically, we model the marginal default times to follow some contagion intensity processes coupled with copula dependence structure. We apply the total hazard construction method to generate ordered default times and numerically compare the pricing impact of different models on basket CDSs and CDOs in the presence of exponential decay and counterparty risk.

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    File URL: http://arxiv.org/pdf/1010.4053
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1010.4053.

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    Date of creation: Oct 2010
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    Handle: RePEc:arx:papers:1010.4053

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    Web page: http://arxiv.org/

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